The purpose of this study is to investigate and overview the effectiveness of IT in a SC in order to increase the value for a firm and efficiency in a manufacturing sector. It shall be analyzed how the implementation of a new information system can support value creation. However, before analyzing how IT impacts VC processes, it shall be identified, whether there actual is an impact. The aspect of how IS involved in the process of integrating new IT will be considered. Possible challenges and risks will determine an important issue as well. These steps will be supported by a single narrative case study, namely a Danish company, which operates in the manufacturing sector and which aims to increase the company’s value by implementing a new IT system. The company’s VC processes will be identified with regard to a VC analysis in order to detect possible relations between technology and value activities. These relations shall identify, whether there are linkages between technology and the process of value creation.
Table of Contents
Table of figures
List of abbreviations
Abstract
1. Introduction
1.1 Purpose and research questions
1.2 Design of the study
Choice of theoretical background
Choice of general methodology
Research limitations
1.3. Structure of the report
1.4. Definitions of core terminology
2. Theoretical Framework
2.1. Market oriented view
2.2. Literature Review
3. Empirical design of the study
3.1. Research approaches
3.2. Research strategies
The Case study
Interview
Grounded Theory
Archival research strategy
3.3. Validity and Reliability of empirical data
4. The case study of LINAK A/S
4.1. General facts about LINAK A/S
4.2. Supply Chain of LINAK A/S
5. Descriptive analysis
5.1. Empirical findings
6. Contingency Analysis
6.1 Defining support and primary activities at LINAK A/S
6.2. Linkages between TD and support activities
7. Discussion
7.1. Further research
7.2. Recommendations for LINAK A/S
8. Conclusion
Bibliography
Appendices
Table of figures
Figure 1: Elements of market/ structure / conduct (Bain, 1968)
Figure 2: Porter's five forces (Porter & Millar, 1985)
Figure 3: Value Chain Analysis Model (Porter, 1985)
Figure 4: Porter's Generic Strategies (Porter, 1980)
Figure 5: Approach to summarize the material (created by Julia Rojahn, 2017)
Figure 6: Types of shared information (created by Julia Rojahn, 2017)
Figure 7: Information transfer (created by Julia Rojahn, 2017)
Figure 8: Quality of Information Sharing (created by Julia Rojahn, 2017)
Figure 9: Issues with regard to a new system (created by Julia Rojahn, 2017)
Figure 10: Requirements for a new system (created by Julia Rojahn, 2017)
Figure 11: Linkages between TD and primary activities (created by Julia Rojahn, 2017)
List of abbreviations
Abbildung in dieser Leseprobe nicht enthalten
Abstract
1. Introduction
Within the last decades, globalization has become one of the major underlying trends, characterized by dynamic environmental changes with intense competition (Lee, 1998). Contemporary businesses do no longer only compete on national markets, but on multiple international levels. Dynamic markets, short product life cycles, a rising number of competitors, customized products, and continuously changing demand pattern are attributes that firms must deal with nowadays. Businesses try hardly to compete on the global market by selling their products for best prices. The variety is huge and customers have plenty of choices between similar products with same prices. Due to that, the price is no longer the main attribute that matters to the customers.
In order to survive in today’s global economy, companies must encourage and extend its main qualifications and benefits in order to stay or become competitive. They compete on several global bases, which is why past insignificant attributes evolve as being more important. The quality of products, customer service, delivery time, expertise, innovative products, and skills of employees are competitive factors, which can be essential for a firm in terms of surviving on the global market (Wadhwa et al., 2010).
However, one of the major factors to succeed on the market is to provide an efficient and effective supply chain (SC). Global competition makes it necessary to constantly seek ways to reduce costs while increasing efficiency. This requires a totally different approach to the way an organization used to look at the entire SC. New partnership relationships among SC partners such as suppliers, manufactures, retailers, and other parties have replaced the conventional free market structure (Yu et al., 2001). A SC partnership is a relationship between two independent members in supply channels through increased levels of information sharing (IS) in order to achieve specific goals and to benefit in total costs and inventories reductions (a win-win situation) (Yu et al., 2001). Collaborations with competitors upstream and downstream of the SC become essential. Companies and especially manufacturing companies are forced to joint their own competences with capabilities of SC partners. Coordination and integration in SC turn out to be extremely important. The decentralization of the SC, which means the delegation of power and functions from one party to others, has strongly increased in importance.
This is one of the reasons why the term Supply Chain Management (SCM) has been evolved and is used to describe the coordination of order management along an entire SC (Wadhwa et al., 2010). SCM can be seen as an element of Strategic Management, which is the management of an organization’s resources to achieve the goals and objectives. It has established as a discipline that integrates research, teaching, and management practice (Schendel & Hofer, 1979). It is a multidisciplinary area of research and has imported concepts and theories from political science, evolutionary ecology and biology, systems science, and philosophy (Durand et al., 2016). Its main elements are determining objectives, analyzing the competitive environment, analyzing the internal organization and evaluating strategies to increase and competitiveness” (Investopedia, 2017).
Firms have realized the importance and benefits of SCM and of having a close relation to its SC partners. The physical, financial as well as the information flow are integrated in SCM patterns and can be improved through an efficient and effective coordination. Dynamic and global markets force companies to possess flexible business processes and network structures, which can be supported by an effective SC. Coordination of products and information flow among suppliers, manufacturers, distributors, retailers and customers through sharing important information among each other fosters SC performance.
SC performance illustrates the degree of how well SC partners are working together. It can be measured by using a set of performance metrics or key performance indicators (KPIs) to ensure that everyone knows the objectives that must be achieved. Further, SCM attributes such as quick response to customer demand, collaborative planning, forecasting and efficient customer respond are strategies that also increase SC performance and by that increase competitiveness (Wadhwa et al., 2010). An increasing customer service level and reduced costs are only two of several benefits that come along by an increase in SC performance. An increase in SC performance can on the other hand boost the internal firm performance and by that may increase the value for the firm and develop a competitive advantage.
However, as companies can participate in a number of SC that exhibit many different SC partners, it is of great importance to a firm to select its partners carefully. The level of integration is strongly related to factors such as firm capabilities, complexity of products, and corporate compatibleness among the firms (Kumar & Pugazhendhi, 2012).
Due to globalization, growing complexities of business environment, and increasing level of inter-company dependency, IS in the SC has been developed as an enabler for competitiveness. Companies must eliminate uncertainties, reduce unnecessary inventory and respond faster. In order to do so, companies must create and share up-to-date and appropriate knowledge and information about each process step, not only internal but also external. In that case, internal integration will enable external integration, since the SC partners can act and respond to foregoing processes more effectively and efficiently. Quality of information and availability at the right time at the right place is necessary to have a seamless flow. Nevertheless, in order to achieve high degrees of IS to foster SC performance and possibly increase the value of the firm, an investment in information technology (IT), such as information systems, is indispensable. With the advancement in information and communication technology, IS can increase in efficiency and the coordination among SC partners can become better and even closer (Omar et al., 2010). IT systems enable a firm to exchange information and data quickly, and to respond to changes on demand and on the market even faster. Moreover, IT can affect the entire process by which companies manufacture their products, including the entire package of physical goods, the services, and the general information that is provided by the firm, and which creates value for its buyers. It further helps a firm in terms of coordination and cooperation in several different SC (Porter & Millar, 1985).
Though, it must be considered that IS is not always performed as effective and efficient as it should be. The lack of communication between functional partners is a strong barrier that hinders SCM to be most effective. SC Transparency is often not achieved, since partners may not possess the willingness to share knowledge among the SC. Further, the quality of information is often not as proper as it is supposed or expected to be. The absence of information about e.g. inventory status or forecast also leads to a bad information flow, which causes longer lead-times, higher costs, and a decrease in firm as well as SC performance. This is why the value of IS depends on several conditions and different IS results in different benefits.
One important concept that is strongly connected to these terms is “Value Chain” (VC). This term divides the activities that a firm performs into technologically and economically activities. Value is measured by the amount that the buyer is willing to pay for a product or service. Only if the value that is created exceeds the cost of performing those value activities, the business can gain in profit. In order to obtain competitive advantage, the firm must either perform these activities at lower cost than the rivals or they differentiate those activities due to extra features (Porter & Millar, How information gives you competitive advantage, 1985).
Current literature analyzes the importance of information quality and IS as well as the importance of IT systems in a two level SC. Lee and Whang (2000) demonstrate that sharing market knowledge could improve promotion planning. Lee et al. (2000) discuss the value of demand IS between retailers and their upstream partners. Omar et al. (2010) analyze the types of information shared between manufacturers and suppliers, the aspects of information quality, and the IT tools utilized by manufacturing firms.
Kumar and Pugazhendhi on the other hand (2012) illustrate the impacts of IS in SC in general, as well as its benefits and challenges.
However, none of these studies focuses on the impact of IT systems on value creation for a company. The lack of existing studies concerning this topic stresses the need to investigate the subject even deeper. IS in a SC may bring a number of benefits to enterprises, which can be even higher when increasing the willingness to share it, and the accuracy of information quality.
The purpose of this study is to investigate and overview the effectiveness of IT in a SC in order to increase the value for a firm and efficiency in a manufacturing sector. It shall be analyzed how the implementation of a new information system can support value creation. However, before analyzing how IT impacts VC processes, it shall be identified, whether there actual is an impact. In addition. The aspect of how IS involved in the process of integrating new IT will be considered. Possible challenges and risks will determine an important issue as well. These steps will be supported by a single narrative case study, namely the Danish company LINAK A/S, which operates in the manufacturing sector and which aims to increase the company’s value by implementing a new IT system. The company’s VC processes will be identified with regard to a VC analysis in order to detect possible relations between technology and value activities. These relations shall identify, whether there are linkages between technology and the process of value creation.
1.1 Purpose and research questions
On behalf of the foregoing introduction, the need to analyze the impact of IT on value creation has been stressed out. IT systems seem as being an essential determinant when it comes to increases in performance, either SC or firm performance. The assumption is that introducing information systems to the daily business processes, can foster value for an organization, due to a correlation between IT and certain VC activities of the firm. The Danish manufacturing company LINAK A/S wants to integrate a new IT system in order to improve its VC processes and IS, and to enhance the communication with its SC partners. The firm aims to decrease costs and to foster SC integration, and with that creating value for the organization and its customers.
On account of that, the following research question (RQ) has evolved and shall be analyzed in this study:
How can Information systems create value for a company?
However, before analyzing how value can be created with regard to an IT implementation, it is of great importance to state whether IT can actually create value for a company. Further, as current literature has identified the importance of IS and its close relation to IT, the question of how IS in involved in the process of creating value through information systems arises. Essential to analyze is also the question of what challenges can occur when integrating a new information system. Here it is interesting to identify internal and external challenges. On behalf of these considerations, the following sub-research questions (SRQ) have been established and will be answered in this study in order to support the response of the main research question.
1. Does IT create value for a company?
2. How is IS involved in the process of creating value through IT?
3. What internal and external challenges can arise when integrating an new information system?
1.2 Design of the study
The following abstract will explain the design of this research study by determining necessary steps to analyze the research and sub-research questions. This shall give the reader a short explanation of the choice for the theoretical framework and methodology has been chosen, and what limitations have margined this research.
Choice of theoretical background
The theoretical background of this research opens by giving a short introduction to the market oriented view, which implies the main theoretical framework for this study. It exhibits the theories with regard to the paradigm of the market oriented view, which contains the presentation of the Structure Conduct Performance Paradigm (SCPP), M. Porter’s five Forces, the VC analysis concept, and a short presentation of the concepts of SWOT analysis and Generic Strategies by. After that, a literature review will be conducted.
In order to obtain the sense of how IT and its impact on VC activities can be classified into related research topics, an introduction to the market oriented view and its relating issues are given (including the SCPP, Competitive Five Forces, VC analysis concept, SWOT analysis and Generic Strategies).
The VC Analysis model by M. Porter shall support the contingency analysis in terms of identifying the current situation of physical and technological value activities that LINAK performs in order to generate value for its customers and itself. It describes any value activity that an organization performs, and links these activities to the organization’s competitiveness on the market. In addition, it aims to evaluate the value each particular activity can add to the organization’s product or service. Since the model includes, among three other categories, the term Technology Development (TD), the model will be used to investigate, whether IT has an impact on the value of a company. It will further help to respond to how IS is involved in the process of creating value for a company with the help of IT, and how IT can create value.
By conducting the literature review, the reader shall receive a general overview of recent studies on this interview. Relevant information and sources will show how broad the topic has already been researched and where lacks may occur.
In addition, the literature review will help to answer how IS in involved in the process of creating value and what risks may arise internally and externally when integrating new IT.
However, conducting a literature review shall not only be beneficial for the reader, but also for the researcher himself. By presenting existing literature methodology, content and conclusions of other researches ensure the researcher to receive a better understanding of key issues and to gain a better insight into this topic. This also avoids the repetition of existing research, and new research outcomes are more likely. New angles that may occur while summarizing existing literature may need further exploration, and can be followed up with new studies. Further, due to reviewing present literature, approaches that have been launched can be considered and carefully selected for the own study.
Choice of general methodology
The main objective of this study is to analyze how IT can add value for a company. In order to investigate the matters of that, the Danish company LINAK A/S will serve as a narrative single-case study. This shall give real data and demonstrate the current situation of the activities that LINAK performs, and if those activities are linked to IT, and hence add value for LINAK A/S. Evolving issues and possible improvements shall be investigated, and a response to the question of whether IS is involved in the process of creating shall be found. Internal desk-research at LINAK A/S and semi-structured interviews with SC Managers from LINAK and a with one customer of the firm have been applied, since these procedures gather real data and demonstrate the current situation as it is actually observed by the parties.
Qualitative interviewing is generally seen as less structured and more flexible. New questions may arise due to respondent’s replies and the order of the questions may also vary. It supports a free-minded questioning and answering to freely discuss the respondents’ opinions (Bryman & Bell, 2011).
This study is mainly based on qualitative research from the constructivist paradigm in terms of primary data. The aim is to investigate how the respondents interpret their own reality. In order to seek a causative relationship between established variables, the semi-structured interviews will be categorized into specific variables. The need for that is reasoned by the fact that as much significant data as possible must be collected in order to accomplish deeper understanding of this issue. More concrete statements can be established (Saunders et al., 2007).
Research limitations
With reference to M. Porter (1985), when integrating the VC analysis model in order to identify the impact of certain value activtitites on the firm’s VC, the entire value system including external parties must be analysed. However, since this thesis only focusses on LINAK’s efforts in IT and its impact on the value creation for the customer and itself, an ample analysis would be out of the scope. Hence, only the linakges between the support activtity TD and the five primary value activitites will be analyzed.
In accordance to Porter and Millar (1985), IT can create competitive advantage, spawns completely new businesses and changes the industry structure. Considering the fact of changing the industry structure, Porter has introduced the Five Competitive Forces, which are an essential part of the market oriented view. Even though, Porter says that these forces are affected by IT, this approach will not be considered in this thesis. Moreover, the SCPP, which aims to analyze the relations from market to conduct and performance, will also not be further analyzed in the analysis part. It goes beyond the scope of this approach, since a deeper analysis of the market in which LINAK A/S is operating would be necessary. Further analyses of suppliers and buyers, new entrants and substitute products as well as existing competitors would be essential in order to proper integrate the five forces approach.
In addition, also the SWOT analysis, which is an essential element of the market oriented view, will not be integrated in this study. Deeper analysis with regard to strengths, weaknesses, opportunities and threats of LINAK A/S are out of the scope for this thesis.
Further, the analysis will be based on a company in the manufacturing sector, which is why other sectors are excluded from this analysis.
The last delimitation will be the technical part of implementing a new information system. The detailed technical description of what must be considered when integrating it are excluded.
1.3. Structure of the report
This part will shortly present the structure of the eight individual chapters of this dissertation.
Chapter 1 introduces the research topic and context. It presents the purpose of this study, and the research question and sub-research questions. It points out the design of the study in terms of the choice of theoretical background and methodology, and it introduces research limitations and the core terminology.
Chapter 2 presents the theoretical framework with regard to the market oriented view. It also reviews additional literature in a structured way in order to provide an insight into the topic.
Chapter 3 explains the empirical design of the study, namely the methods used for data collection and data analysis. The type of research approach and the research strategies are exhibit. This includes the methodologies of a case study, interview, grounded theory, and archival research strategy. The terms validity and reliability are also introduced and referred to the content of the methodology of this study.
Chapter 4 introduces the case study of LINAK A/S. It shortly presents general aspects about the company and its SC as well as it represents the intention of the firm to implement new IT.
Chapter 5 illustrates the descriptive analysis of the semi-structured interviews. It shows the variables that have been developed due to classifying the statements of the respondents into specific categories.
Chapter 6 demonstrates the contingency analysis. It starts with defining support and primary activities of the VC of LINAK A/S and ends with identifying the linkages between the support activity TD and all five primary activities.
Chapter 7 critically discusses the results of the descriptive and contingency analysis. It further concludes on the research question and sub-research questions. Next to this, it also demonstrates the relevancy of this study as well as the limitations and possible further researches.
Chapter 8 summarizes the content of the entire dissertation. It repeats main aspects with regard to the theoretical framework, methodology, and both analysis as well as the discussion.
1.4. Definitions of core terminology
The following section will introduce important definitions that occur during the thesis. These serve as an explanation in case of misunderstandings of core terminology.
Supply Chain
A SC consists of several different parties that add essential elements to one product or service in order to add value to a product. Each of these parties provide a competence that is not given by another, which is why each of them is essential in order to create value (Mangan et al., 2012). The parties are organized in a chain. Whenever one has finished its contribution process, the next in line has the duty to add further value to the product. Due to competitive markets, manufacturing companies are forced to join their own competences with capabilities of external partners (Vijayvargiya & Dey, 2010).
In accordance to appendix 1, it can be seen that a SC is the entire way of a product being manufactured until it is distributed to the end-customer. It contains the steps of raw-material procurement, delivery to the manufactory through a supplier, the production, and the distribution through the distributor towards the end-customer. The way from the distributor to the end-customer can sometimes also exhibit a further step, namely distribution through the retailer who sells the products to the end-customer (Mangan et al., 2012).
Supply Chain Management
SCM contains each activity across and within a network of upstream and downstream organizations that is related to the flow and transformation of goods from raw material, to the finished product, as well as the information flow and resources (Mangan et al., 2012). These activities possess vertical and horizontal collaboration with SC partners, which is why it can be seen as the coordination of all players along the SC. Vertical collaboration includes collaborations of the firm with customers and suppliers, which can be strategic alliances in order to have a competitive advantage over the competitors. Horizontal collaboration is working in cooperation with other organizations and competitors that are operating in the same business area (Simamora et al. , 2016).
“SCM seeks to achieve the overall and long-time benefit of all parties on the chain through cooperation and information sharing,. By coordinating different parties along the logsitic network, or establishing business partnerships, SCM creates a win-win situation for all members” (Yu et al., 2001, p. 114).
Appendix 2 demonstrates the various components and process steps that a SCM contains.
In accordance to that, the primary goods flow starts at the supplier. Before the goods have arrived at the ultimate customer, the components will be purchased and manufactured. After that, the finished product will be distributed, merchandised and sold. The information flow from the manufacturing company goes in both directions - to the supplier but also to the customer. The supplier will be contacted in order to deliver raw material and the customer will be informed about e.g. current state of production and delivery date.
The flow of funds starts at the customer side and ends at the supplier side.
The products that will be returned to the manufactory or even further to the supplier, as well as e.g. products that hold pledge, will be part of the Reverse Goods Flow.
Consequently, the SCM is responsible to coordinate each step of the SC and to create effective and efficient interactions between all collaborations in order to create the highest value for the customer.
Value and Value Chain (VC)
A firm’s VC is a system of interdependent activities that are connected. Those actitivitites, also called “value activities”, are divided into physically and technologically distinct activities, and are those ones, which describe the product lifecycle – from designing to producing over marketing, distrubting and supporting. Connections between these appear when one activity affects the cost or effectiveness of another activity. These linkages often create trade-offs. For instance, high costly product design and more expensive raw material can reduce after-sales costs, since customer service supply will be less likely (Porter & Millar, 1985). “Value is the amount buyers are willing to pay for what a firm provides them. Value is measured by total revenue, which is a reflection of the price a firm’s product commands and the units it can sell. A firm is profitable if the value it commands exceeds the costs involved in creating the product.” (Porter, 1985 p. 36).
The further the product moves on to the downstream flow (the flow towards the customer), the more value is usually added (Erlach, 2013). The value that is created by a company is measured by the amount that the end-customer is willing to pay for the product or service. If the value that is created exceeds the costs of performing the value activities, the firm gains in profits. With regard to Mangan et al. (2012) value can occur in form of activties that phyisically change the shape or character of a product or assembly. The product can increase in value when essential elements such as high quality of components as well as short lead times, low prices and good process quality such as accuracy of delivery time are contributed. A VC includes all value and non-value adding steps of manufacturing a product - from raw material until finished product (Rother & Shook, 2003).
Value Management (VM)
With regard to Kelly et al. (2014), VM is a change-oriented methodology, a set of principles and a formal, structured and value-based management that shall improve the organization’s performance by increasing effectiveness and efficiency of the VC through a value study. This change-management involves all key stakeholders that are responsible for important value transfers in the supply. Moreover, it is “an application of value analysis (value engineering) techniques for improvement of business effectiveness and efficiency” (Web Finance Inc., 2016). VM shall improve and sustain a desirable balance of wants and needs of all stakeholders (The Institute of Value Management, n/a).
Competitive advantage
“Competitive advantage describes the way a firm can choose and implement a generic strategy to achieve and sustain advantages over its competitors. It addresses the interplay between the types of competitive advantage – cost and differentiation –and the scope of a firm’s activities. The scope of a firm’s activities can have a powerful role in competitive advantage through the influence on the VC” (Porter, 1985 p.26).
Companies often differ in competitive scope. It has four key dimensions: segment scope, vertical scope (the degree of vertical integration), geographic scope and industry scope (the industries in which the companies are operating in). It is a powerful tool to create competitive advantage. A broad scope can serve a high quantity of different industries, and exploit relationships between VC. Expanding and operating nationally and globally brings an advantage over local or domestic rivals. A narrow scope can be beneficial in terms of tailoring the VC to a particular target due to customizing the VC and best serve particular product varieties.
Firm performance and SC performance
Firm performance is the process of measuring the efficiency and effectiveness of the firm activities. This determines how successful a firm is operating over a certain period of time (Neely et al., 2005). Firm performance requires measurements to identify the level of the impact of used resources on firm performance. For instance, it can be measured by the financial situation and profits of a company (Lebas, 1995; Neely et al., 2005). However, it can also be impacted by corporate governance (Ehikioya, 2009).
SC performance is measured by comparing the results of firms along the industry in terms of efficiency, different ratios and profitability levels. Production efficiency, advanced technology, product quality and profit rate are essential determinants here (Bain 1951; Tung et al., 2010).
Information sharing
Sharing and distributing useful up-to-date information for systems, people or organizational units along all SC partners (including suppliers, distributors, manufacturers, retailers and customers, and sometimes competitors) to improve SC performance (Lotfi et al., 2013).
Information system
An information system is “a combination of hardware, software, infrastructure and trained personnel organized to facilitate planning, control, coordination, and decision making in an organization” (Business Dictionary, n/a). They are used to collect, filter, create, and distribute useful data and information. Examples for information systems are ERP and CRM systems. An ERP is an Enterprise Resource Planning system. It is a business process management software that manage the business of an organization through integrated applications, and automates many back office functions. It includes functions such as product planning, development, inventory and order management, manufacturing, sales and marketing as well as accounting, human resources and customer relationship management (CRM). It is a shared database that can be used by different business units and even by different companies (if certain arrangements have been done). It can improve e-commerce business processes, including web-based ordering and order tracing (O'Leary, 2000).
This chapter has introduced the research question and sub-research questions, the choice of research design and the limitations that margin this dissertation. It further demonstrated essential terminology for this research in order to help understanding the subject more easily. Further explanations with regard to the issue of IT as well as the identification of the theoretical framework will be given in the next section. This will help the reader to understand the process of this study.
2. Theoretical Framework
In order to understand the sense of this study, this part will identify the theoretical framework of this issue. It will start with presenting the issue of the market oriented view. This contains the demonstration of the SCPP, M. Porter’s five Forces, the VC analysis concept, and a short presentation of the concepts of SWOT and Generic Strategies by M. Porter. This shall help to easier classify the issue of IT into related and higher research topics. The VC analysis concept will further serve as the basis concept for the contingency analysis in order to evaluate the current situation at LINAK A/S in terms of identifying activities in the daily processes that are related to data and IS.
Subsequent to that, related important studies and essential literati, who contributed important research elements to the issue of IS and IT, will be depicted. It will present a brief introduction of how IT has evolved in the past decades, how IS is linked to IT, and what benefits and risks are connected to IT.
2.1. Market oriented view
Increasing competition, shortening product life-cycles, and a constant development of new products have increased the necessity for firms to start focusing on the market and its processes. Many researchers have identified the importance of not only focusing on the firm’s resources and customers’ desires, but also on the market power itself, and by that viewing it from a VC perspective (Baker et al., 1999; Langarek, 2001; Grunert et al., 2002).
Market oriented product innovation is an essential process for creating superior customer value through high innovative products. Market orientation is commonly defined as “the extent to which an actor in the marketplace uses knowledge about the market, especially about customers, as a basis for decision-making on what to produce, how to produce it, and how to market it” (Jaworski & Kohli, 1993; Kohli & Jaworski, 1990). A market oriented view is essential for a firm to create superior customer value, which in turn is regarded as a major determinant of competitive advantage (Kohli & Jaworski, 1990; Narver & Slater, 1990; Day, 1994; Srivastava et al., 2001). The degree of market orientation is a determinant of profitability of companies as well. A higher degree of market orientation is better for a company’s profitability (Jaworski & Kohli, 1993; Fritz, 1996). Plus it is a key driver for new product success (Atuahene-Gima et al., 2005). Companies interact in VC in order to create value for the end-user. It is the market intelligence of the firm pertaining to current and future customer needs.
However, in order to provide a well-developed market orientation, a foregoing analysis of target markets and industries is essential. One of the most known approaches for that is the Structure, Conduct and Performance paradigm (SCP ). It is used as an analytical framework to create relations between market structure, market conduct and market performance (Policonomics, 2012). It was developed by Joe S. Bain in his book “Industrial Organization”. Even though the economist Edward Chamberlin and Joan Robinson have first published it, the expanded version by Bain is most used.
Figure 1 demonstrates the elements of this paradigm, which will be further analyzed here after.
Abbildung in dieser Leseprobe nicht enthalten
Figure 1: Elements of market/ structure / conduct (Bain, 1968)
The SCP is applied to the manufacturing industry and identifies the one-way relationships from market structure to conduct and performance. Bain (1951; 1956) stated that market structure affects firm performance directly. Market structure acts as a characteristic of market organization, such as the numbers of consumers, supply and concentration as well as the degree of market power, product differentiation and market entrance barriers. The variables are relatively stable over time and affect the behavior of sellers/buyers. The positive significant relationships between the market share as an index of the market structure and performance in the industry hints to the fact that market share data is taken for calculating the market structure index (Bain, 1951; Bain, 1956; Davies, 1999).
Market conduct is the agreement or policy on prices and quantities from the supplier’s side. It also considers the predatory and exclusionary tactics/strategies as well as the customer purchase behavior. Relating actions to this category are choosing own strategic behaviors, investment in researches and development and advertisement (Bain, 1951; Bain 1956; Tung et al., 2010).
The performance of the market is associated with market structure and strategies of a firm. Production efficiency, advanced technology, product quality and profit rate are essential determinants here. The performance is measured by comparing the results of firms along the industry in terms of efficiency, different ratios and profitability levels as well as employment rate, income distribution and progress research (Bain 1951; Tung et al., 2010).
According to Bain (1951; 1956), the market environment has a direct and short-term influence on the market structure, which on the other hand has directly influence on the firm’s economic conduct. This further impacts the market performance of the firm. However, market performance can also affect market conduct and structure, and market conduct can again influence market structure.
As it can be detected from this concept, each partner of the product lifecycle is involved in the process of adding value to the VC. Therefore, each of those partners must be appreciated and considered when value shall be added to the product. In these terms, not only the customer but also the sellers, suppliers, competitors and other associated parties will benefit. The degree of market orientation of chain members may consequently be influenced by the degree of other chain partners. The competitiveness of the whole VC will be related to all chain members (Grunert et al., 2002). Hence, good relationships between all partners is essential in terms of value creation of not only the product, but also for each party and the entire VC performance.
Michael E. Porter, the economist, researcher and author has used this paradigm for the development of the concept of the Five Competitive Forces . This concept is a way to analyze the level of competition within a certain industry or market.
Abbildung in dieser Leseprobe nicht enthalten
Figure 2: Porter's five forces (Porter & Millar, 1985)
As it can be seen in figure 2, it considers the determinants Threat of new entrants, Threat of substitutes, Bargaining power of buyers, Bargaining power of suppliers and the Industry rivalry. If the combination of all five forces reduces the profitability of the firm, the market will be unattractive to the company and the competition will be very high. The five forces determine industry profitability because they influence the prices, costs, and required investment of firms in an industry (Porter, 1979). “The collective strength of the five forces varies from industry to industry, as does the profitability. The strength of each of the five forces can also change, either improving or eroding the attractiveness of an industry.” (Porter & Millar, 1985 p. 155).
With regard to Porter (1985), competitive advantage can also create value, and vice versa. Though, to gain competitive advantage, the firm’s VC for a certain industry must be identified in the first place. An industry-wide VC would be too broad, as it would obscure certain activities. Hence, a firm’s activities from only one industry musts be constructed. The VC shows total value. A firm operates cost-efficiently, if the value it seeks, exceeds the costs that are involved in manufacturing the product. As a consequence, in order to analyze the competitive position of a firm, the value and not the costs must be identified (Porter, 1985).
The value chain analysis model , introduced by Michael Porter in 1985 in the book Competitive advantage: Creating and sustaining superior performance shall expose the strategic significance of the physical and technological activities that a company performs in order to generate value for its customers and itself, and consequently increase competitive advantage.
The approach seeks to determine opportunities within the company’s business operations, where value for customers can be increased and costs can be lowered in order to maximize the margin. It describes any activity that an organization performs, and links these activities to the organization’s competitiveness on the market. It aims to evaluate the value each particular activity can add to the organization’s product or service. Value adding activities foster the competitive advantage, which is why well performed activities point to the fact that a firm is high compatible in comparison to competitors.
In accordance to Porter (1985), it is a source of competitive advantage being able to perform certain activities well and connect those with each other. These connections are essential when it comes to the achievement of competitive advantage. Since linkages appear when one activity affects another one in terms of cost or effectiveness, it is required that all activities are well-coordinated. “The linkages are about seamless cooperation and information flow between the VC activities” (Recklies, 2001, p. 2). They can be flows of information, goods and services, but also systems and process for adjusting activities (Porter, Competitive Advantage: Creating and Sustaining Superior Performance, 1985; Recklies, 2001). Taking a look at Figure 3, those linkages are represented by the dotted lines. A good coordination of value activities such as using high quality product design and linking this activity to the activity of having higher costs in raw materials, can lead to lower cost in after sales services. This offers benefits in terms of high quality products and customer satisfaction. Hence, a careful management of linkages between all value activities can be powerful in terms of creating and gaining competitive advantage.
Important to mention is also, that linkages between certain activities do not only appear internally, but also create external interdependencies, namely between the company’s VC and those of the SC partners. Due to optimizing and coordinating the outside connections, opportunities for saving costs and a better handling of order processing can be achieved. This can create competitive advantage and increase the success of a firm. A better recognition and exploitation of such linkages by all SC partners can lead to a higher SC performance as well (Porter & Millar, 1985).
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- Quote paper
- Julia Rojahn (Author), 2017, Information Sharing in a Supply Chain. Value Creation through Effective and Efficient Information Technology, Munich, GRIN Verlag, https://www.grin.com/document/1141793
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