I.T. and the Value Chain

My objective here is to show how I.T. can be most useful to an organisation. I will begin by decomposing the firm into its major activities using Michael Porter’s value chain. I will then point out the role of I.T. in the organisation as well as provide my opinion on the general direction that the Davao ICT community should take.

Michael Porter’s value chain helps an organization enumerate its value-adding activities, categorized as either primary or support activities. By decomposing an organisation into its component activities, we are then able to analyse the impact of each on the overall cost incurred by the firm, as well as the overall value delivered to the customer. That is, a firm that successfully manages its value chain is able to deliver maximum value to the customer at minimal cost and thus maximum profits.

The Value Chain
An organization is said to be composed of two types of activities: primary and support. Primary activities are those that directly contribute to the value delivered to the customer. Support activities, meanwhile, contribute indirectly to the delivered value. These support activities span the entire spectrum of primary activities and aid in the efficiency of each.

The Value Chain

Let’s take a look at the primary activities in better detail:

  • Inbound Logistics. Includes activities such as material handling, inventory control, and quality control of input products.
  • Production. Includes all activities that convert inputs into the finished product. Examples are machining/processing, equipment maintenance, testing, facility operations and layout.
  • Outbound Logistics. This includes the collection, proper storage, and distribution of finished products. Delivery vehicle operation and maintenance is also involved.
  • Marketing & Sales. The identification of customer needs and the generation of sales. Basically, the four P’s of marketing.
  • Service. The assistance given to customers after the products and services are sold to them. Examples are installation, repair, parts supply, product adjustment, and customer support.

Now, let’s take a look at the support activities:

  • Procurement. The manner of sourcing direct and indirect inputs such as materials, supplies, and equipment.
  • Technology Development. The “How we do things around here” of the company. Includes corporate and business level R&D.
  • Human Resource Management. Employee recruiting, hiring, training, development, compensation, knowledge management, etc.
  • Firm Infrastructure. Organizational structure, control systems, company culture, etc. This is the bedrock on which all other support and primary activities rest on.

The Role of I.T.
In fast-changing industries and markets, building a highly integrated firm (a firm that is responsible for the majority or all the activities in its value chain) can be as difficult as building a skyscraper on top of continually shifting sand dunes. Firms operating in such environments are better off outsourcing parts of their value chain and focusing on their core competencies. A few years back, this would’ve not been feasible. With the advent of I.T., however, outsourcing non-critical activities has become, not just a possibility, but a necessity. The role of I.T., therefore, is to help firms become more agile by offloading chunks of their value chain to other entities that can perform the task more efficiently.

I believe that the competitive edge of the Davao ICT community can be found by 1) understanding the value chain of its target markets, 2) identifying those parts of the value chain that can be improved through I.T., and then 3) building I.T.-based solutions/services that effectively address those parts. So far, the Philippines has concentrated most its efforts on the “service” activity of the value chain (by creating call centers). As we’ve seen just now, there are other parts of our customer that we can cater to. What we need to do then is 1) identify the parts of the value chain that we can profitably cater to and 2) move to improve our capabilities so that we effectively cater to the selected value chain component(s).

Further Reading

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2 Comments

Filed under Innovation, Tools, Value Chain

2 responses to “I.T. and the Value Chain

  1. You asked me to critique this post, so here goes…

    We all know Michael Porter’s model already (although having posted it might be good for your college student readers), so I wish you’d concentrated more of the content on the Davao I.T. industry side — your thoughts and suggestions. What, in your opinion, must we focus on specifically. Your succinct suggestion, that we must concentrate on supplying for the foreign market’s gaps in its value chain, is a sound one. It’s even one that really needed to be said. But do go on: make the suggestion meatier. 🙂

    I hope that your future posts will include developments of this one!

  2. Thanks for the critique, Blogie. I agree, the post does needs more meat to it but the truth of the matter is I just don’t have the data needed to say with any certainty that the Davao ICT community needs to concentrate on production software for example. But given the resources, I would probably be up to the task of gathering that data.

    By the way, I think this fits in nicely with your suggestion to conduct a manpower and skills survey. Just as I said before, if Davao can simultaneously do both studies (market needs and industry capabilities), I think we’d be in a better position to compete with Cebu and Manila.

    Anyway, yeah. I’ll try to keep tabs on whatever information is necessary to follow up on this post.

    Keep those comments coming! 🙂

    P.S. Re-reading the introduction of this post made me realise that I may have mislead my readers into thinking that I have THE solution for the Davao ICT community. I should correct that soon.

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