A Process For Designing A Value Chain For A New Product

by Barry Pearson

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1. INTRODUCTION

1.1 Objectives of the Process

The origin of the Process was the need for help in making investment decisions of the form "I need a new product/system - should I make it, re-use someone else's, collaborate, ...?" These questions are valid in their own right, but in fact they are all concerned with the nature of the value chain for the product/system. Given the credibility that value chain analysis has in the business and management literature, this is now the focus of the Process.

New management theory and evidence concerned with value chains is being revealed all the time. Typically, each new finding about management theory does not fit into a easily recognised framework - the reader must identify how to fit it in. This is fine for management theorists and consultants, but as Collis and Montgomery (1995) point out, each new approach compounds a manager's confusion about strategy.

The purpose of this Process is, in certain clearly defined cases, to answer the manager's question "yes, but what should I do?".

The prime aim of this Process is to identify a series of steps which will steer a collection of decision makers (managers, marketers, procurement, sales, finance, etc) through a set of investigations, brainstorms, judgements, decisions, until they achieve a broad based framework value chain which they can all understand (even if they don't all agree with all of it).

Grønhaug and Nordhaug (1992) point out that all enterprises make strategic choices, either explicitly and consciously or implicitly and unconsciously and that it is paramount for firms to map and analyse competences and to be alert to ways in which present competences can be improved. The aim of this Process is to enable choices to be "explicit and conscious" and that it should be simple enough to be devolved down the enterprise, rather than be restricted to higher-management.

This Process should be "open". As new management theory and practice is revealed, the basic Process should be able to accommodate this - the Process is the trunk and the set of branches onto which new "leaves" of management expertise can be accommodated.

1.2 The need for such a value chain process

1.2.1 The bird's eye view

Traditional work on value chains describes the internal capability of an enterprise to manage its value chains in an advantageous way. The aim of this Process is to design the complete environment of companies to which the above is an enabler.

It is worth reinforcing the importance of all aspects of this - up-stream, down-stream, and sideways.

Figure 1.1 A bird's-eye view of the value chain

1.2.2 An example from the past

Quinn (1993) points out that a product itself does not create a sustainable edge, so the need is to create a new value chain from the functions associated with new products. The enterprise should determine where it can dominate in that chain. It is easy to go wrong.

IBM collaborated with Intel (chips) and Microsoft (operating system software) in the development of their PC, and gave away $billions of future business. IBM lost control of the value chain, until IBM "dominated" only a tiny piece of value (controlling the BIOS, linking the operating system to the chip), and that was eventually imitated. IBM started with a major asset, its brand, but first Microsoft then Intel built strong brands which eliminated the need for IBM's. (Carroll, 1993, describes this in an entertaining way).

This Process may not have changed the outcome in this case - but I believe it would offer some forewarning.

1.2.3 An example from the future

Voss (1996) paints a picture of constantly remade virtual organisations as they may appear in (say) 2010. He doesn't describe how these organisations will identify themselves.

Since the autonomous teams may comprise only, say, ten people, the process of seeking advantageous partnerships needs to be cost-effective, and generally known rather than being confined to a few higher managers. Processes for doing so may be part of the school curriculum in future. Perhaps this Process will be included!

1.3 Building on product or system development

This Process can be used by an enterprise which needs a new product for its product range, or a new system to enable its operations - the enterprise is acquiring a new asset or resource to use or sell. This report uses "product" to cover both situations. Grønhaug and Nordhaug (1992) point out that products to an increasing extent are made by networks of collaborators. A new product has up-stream and down-stream elements in the value chain, and probably partners/collaborators as well. A system may have just suppliers, and these may be short-term.

During the life cycle there will be needs to acquire assets, including:

• people
• processes
• methodologies
• tools
• integration components
• addition infrastructure

Prahalad and Hamel (1990) point out that outsourcing contributes little to the skills needed to sustain product leadership. The ideal is that each decision to make, buy, collaborate, re-use a product or component contributes not just to the product itself but to the future competence of the enterprise.

The Process may not be restricted to the introduction of new products. Lorange, 1996, shows the similarities between "foreign entry strategies" and "collaborations". In the former case the enterprise acquires a complete part of the value chain, and therefore this Process may help with introducing existing products to new markets.

The decisions don't just exist at the level of the overall product/system - a product may be strategically important, but there may be components of it which are not (for example, the screws which hold it together, or the support service in particular countries). The Process allows different decisions to be made at various levels of decomposition of the product.

1.4 Comparison: New Business Development Process

Bakker, Jones and Nichols (1994) reinforce the need for strategic New Business Development and assert the need to base it on the fundamental strengths of the enterprise. They describe a process for identifying and deploying core competence as the basis for New Business Development.

My corollary is that enterprises should use the need for new products and systems as opportunities to rethink core competence within the value chain, rather than automatically fit the new product into existing value chains. So product development becomes an aspect of corporate development. The Process supports Bakker, Jones and Nichols' statement that options in the case of misfit are alliances, technology transfer, acquisitions, etc.

Their New Business Development Process is a visionary process, in which new directions for the enterprise may be identified. The Process which is the subject of this report necessarily follows from the decision to acquire a new product or system, which should in turn follow from the vision.

This Process may be useful to validate the New Business Development Process and contribute to its evolution.

Figure 1.2 Fit of this Process with the New Business Development Process

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