assignment hn

8/6/2019 Assignment HN

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What Is Value?

The value createdby the firm equals the benefits the firms customers receive minus thecosts the firms suppliers incur and minus the costs of using the firms own assets. To

increase value created, the company increases benefits to its customers, lowers costs ofits suppliers, uses its resources more effectively, or combines suppliers and customers innew or more efficient ways. The firms ability to create and capture value depends on thestrength of competition and the characteristics of the firm. In markets where customerdemand outruns industry capacity, many firms can add value. In markets where industrycapacity outruns customer demand, a firm must have a competitive advantage to survive.The firm must share the value that it creates with its customers and suppliers. The shareof the value that the firm is able to capture is the value of the firm.

Value-driven strategy involves three basic rules. To attract customers away fromcompetitors, the company must provide sufficient customer value as compared to rival

firms. To attract key suppliers away from competitors, the company must offer sufficientsupplier value. To attract investment capital in competition with other market investmentopportunities, the company must increase the value of the firm for its investors.Understanding these three important rules provides managers with a consistentframework for designing and applying strategy. To obtain a competitive advantage, thecompany must create greater total value than its competitors and capture the incrementalvalue that it brings to the market. The competitive advantage of a firm equals thedifference between the overall value created by the industry when the firm is in themarket and the overall value that would be created by the industry when the firm is not inthe market. Thus, competitive advantage is the extra value created by the firm.

What Is Value Creation?

Value creation is a central concept in the management and organization literature for bothmicro level (individual, group) and macro level (organization theory, strategicmanagement) research. To understand value creation, it is first important to define theconcept. Bowman and Ambrosini (2000) introduce and differentiate two types of value atthe organizational level of analysis: use value and exchange value. Use value refers to thespecific quality of a new job, task, product, or service as perceived by users in relation totheir needs, such as the speed or quality of performance on a new task or the aesthetics orperformance features of a new product or service. As Bowman and Ambrosini (2000)note, such judgments are subjective and individual specific. They label the second type ofvalue exchange value, which we define as either the monetary amount realized at acertain point in time, when the exchange of the new task, good, service, or product takesplace, or the amount paid by the user to the seller for the use value of the focal task, job, product, or service. Viewed together, these definitions suggest that value creationdepends on the relative amount of value that is subjectively realized by a target user (orbuyer) who is the focus of value creationwhether individual, organization, or societyand that this subjective value realization must at least translate into the users willingness


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companys customers receive and the cost to the companys input suppliers, including thecost of the companys self-supplied inputs. All value creation begins with the companysfinal customer. The customer receives some benefits from consuming a product providedby a company. The dollar measure of those benefits is the customers willingness to pay,which is defined as the maximum amount that the customer would pay for that product.

Accordingly, the customers benefit is also referred to as the customers willingness topay. Forexample, if a customer is willing to pay at most $200 for a particularproduct,then that is the customers benefit from consuming that product.The value created by thefirm is necessarily limited by itscustomers willingness to pay.

There is no free lunch. Providing a product that benefits customers necessarily requirescostly inputs. The firm obtains various inputs from suppliers. The firm also supplies someof its own inputs, including information assets such as business methods, inventions, andmarket knowledge. For most productive inputs provided by the firm itself, the mostaccurate measure of cost is the market value of that input, which is simply the currentmarket price of the input. For those inputs provided by the firm for which there is no

readily available market price, it is necessary to estimate the market value.The best estimate of the market value of an input is based on the opportunity cost of theinput. Recall that opportunity costs are what the inputs would earn in the best opportunityforgone; that is, the return from the best alternative employment of that input. Forexample, if a company owns a plot of land that it could sell to another company that isthe opportunity cost of using the land. The cost of the entrepreneurs time and effort instarting a firm is what the entrepreneur could have earned in his or her best alternativeoccupation.

The costs incurred by the firms suppliers are the purchase costs of all inputs includinglabor, natural resources, manufactured parts and components, technology, and capitalequipment. Supplier costs further include the costs of all services obtained by the firm,including the costs associated with completing transactions, such as legal, accounting,marketing, and sales costs. The costs of the supplier also include the cost of capitalwhether that capital is obtained through debt or sale of equity.Therefore, the value createdby the firm equals the benefits obtained by the firmscustomers minus the total costs of inputs provided by the firm and its suppliers. Theprinciples of value creation can be illustrated with a basic example. A single customerrepresenting a specific market segment is willing to pay a maximum of $200. Therefore,the most value that the company could create is $200. In serving the customer, thecompany employs some of its own assets that are valued at $80. The company alsopurchases inputs from a supplier which cost $50. The value created by the companysbuy-and-sell transaction is the customers net benefit net of the cost of using the firmsassets and the suppliers costs: $200 $80 $50 = $70.

The Process of Value Creation:

There are at least two possible ways to conceptualize the process of value creation: (1) asingle universal conceptualization and (2) a contingency perspective that explicates how


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value is created from the vantage point or perspective of a particular source. Answeringthe question of how value is created requires one to define the source and targets of valuecreation and the level of analysis. We posit that when the individual is the unit ofanalysis, the focal process is the creative acts displayed by individuals and a select set ofindividual attributes, such as ability, motivation, and intelligence, and their interactions

with the environment. When the organization is the source of value creation, issuesregarding innovation, knowledge creation, invention, and management gain prominence.Finally, at the societal level, the level of entrepreneurship and macroeconomic conditionsin the external environment, including laws and regulations restricting or encouraginginnovation and entrepreneurship, come into play.

The Organization as a Source of Value Creation:

Moving to the organizational level of analysis, in his book on competitive advantage,Porter (1985) contends that new value is created when firms develop/invent new ways ofdoing things using new methods, new technologies, and/or new forms of raw material.

Thus, when the organization is the unit of analysis, innovation and invention activitiesimpact the value creation process. Damanpour (1995) suggests that innovativeorganizations introduce new products or services or new management practices related tothe products or services. The new products, services, or practices arise from theinnovation process, which Van de Ven, Polley, Garud, and Venkataraman (1999) argueconsists of an intentional effort to develop a novel idea, involving significant market,technical, and organizational ambiguity; regarding a commitment of collective effort overan extended period of time; and requiring more resources than are currently held by theparties involved. Further, the literature suggests that firms are more likely to innovatewhen they face uncertain environments (Brown & Eisenhardt, 1997), enjoy slackresources (Van de Ven, Venkataraman, Polley, & Garud, 1989), are managed by

entrepreneurial managers (Brown & Eisenhardt, 1998), have large social networks(Smith, Collins, & Clark, 2005), and have the organizational capacity to combine andexchange knowledge into new knowledge (Nahapiet & Ghoshal, 1998; Smith et al.,2005).

A second body of literature in the field of strategic managementdynamic capabilitiesalso has examined how organizations create value by focusing on how firms can createnew advantages as existing ones are worn away by environmental changes. For example,Teece, Pisano, and Shuen contend that firms build advantages by distinctiveorganizational processes, asset positions, and evolutionary paths that allow them tointegrate, build, and reconfigure internal and external competencies (1997: 516).

Conversely, Eisenhardt and Martin (2000) argue that dynamic capabilities are morecommonplace and readily identifiable processes and routines that pertain to howresources are acquired, integrated, and reconfigured. Zollo and Winter (2002) and Winter(2003) further suggest that such capabilities are the activities that generate and modifyoperating routines to create new advantages. Dynamic capability scholars have alsobegun to empirically identify the factors that lead to the creation of new advantages,including product and process development (Helfat, 1997), organizational evolution(Brown & Eisenhardt, 1997; Rindova & Kotha, 2001), and managerial capabilities and


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cognition (Adner & Helfat, 2003; Tripsas & Gavetti, 2000). Much of this literature isfocused on factors internal to the firm and emphasizes knowledge creation, learning, andentrepreneurship in creating new advantages. Yet, in our view, the dynamic capabilitiesliterature on creating new advantages A third stream of organizational-level literature haspaid increased attention to the process through which new organizational knowledge is

currently neglects the importance of the target users, their perceptions, desires, andalternatives, as well as the context in which users are embedded. A third stream oforganizational-level literature has paid increased attention to the process through whichnew organizational knowledge is generated and, hence, value created. Presumably, suchnew knowledge can lead to greater value for target users. In particular, Nahapiet andGhoshal (1998) suggest that the social connections of individuals within the firm willprovide greater information and knowledge that can be used by organizational membersto combine and exchange this information in a way that produces new organizationalknowledge. Smith et al. (2005) found that social networks of organizational memberswere positively related to the knowledge creation capability and that this capability itselfwas an organizational level concept that was positively related to firm innovation. Thus,

it may be that social networks that are externally directed to detect the needs of customersand product/service users have greater potential for novel and appropriate product/serviceinnovations.

A final body of literature that is also relevant to the organization as a source of valuecreation is strategic HRM research. Strategic HRM researchers have examined the role ofmanagement in the process of value creation quite extensively. Practices identified fromthis body of research have been found to both build employee skills and motivate them towork toward organizational value creation (Wright & McMahan, 1992). Strategic HRMresearch, for example, has demonstrated that use of high-investment HRM systems thatinclude practices that develop employee skills, enhance the motivation to work towardorganizational objectives, and provide the discretion needed to quickly take appropriateactions to achieve organizational goals is related to a variety of important outcomes, suchas employee turnover (Guthrie, 2001; Huselid, 1995), organizational commitment(Whitener, 2001), operational performance (Youndt, Snell, Dean, & Lepak, 1996), andfinancial performance (Delery & Doty, 1996; Huselid, 1995).

Extending this logic to a knowledge-based context, Kang et al. (this issue) suggest thatfirm success rests on the firms ability to offer new and superior customer value, which,in turn, depends on its ability to explore and exploit employee knowledge that canbecome the basis of important innovations that create value for targeted customers. Kanget al. recognize, however, that firms ability to leverage employee knowledge requiresthat they design HR systems that encourage entrepreneurial activity among employeesresulting in exploratory innovation, as well as cooperative employee activities that exploitand extend existing knowledge for competitive advantage.

To this point, our discussion has implied that the target or user of value is almostexclusively an internal or external customer of the organization. Yet we would be remissif we allowed the reader to believe that the customer is the exclusive target or user ofvalue creation. Rather, many potential targets for value creation exist at the


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organizational level. For example, researchers focusing on corporate social responsibilityexamine the actions of organizations that are intended to further social good, beyond theinterests of the firm and what is required by law (McWilliams & Siegel, 2001). Similarly,in their book on stakeholder analysis, Post et al. (2002) suggest that the purpose of theorganization is to create value in many different ways for many different targets,

including earnings for owners, pay for employees and benefits for customers, and taxesfor society. Further, these authors send a strong message to organizations regarding theirbroad responsibilities in creating value and wealth, and they note that the corporation(organization) cannotand should notsurvive if it does not take responsibility for thewelfare of all of its constituents and for the well-being of the larger society within whichit operates (2002: 1617)

By definition, various stakeholders have different views as to what is valuable because ofunique knowledge, goals, and context conditions that affect how the novelty andappropriateness of the new value will be evaluated. Moreover, they may have competinginterests and viewpoints on what is valuable. For example, investors may favor any

value-creating activities that add to short-term profits, whereas environmentalists may prefer only those value creating activities that preserve the environment. Thus, astakeholder approach requires that organizations take a broader and a longer term viewregarding the targets of value creation. This perspective, in our opinion, is importantbecause it suggests that there will be different and perhaps competing viewpoints amongusers on what is valuable and, thus, that organizations must direct time and effort towardrecognizing and, to some degree, reconciling these differences.

Analyzing Value Creation: The Value Chain Analysis

Most mangers know that their organizations value chain represents the sequence ofactivities necessary to create a product or service, produce or deliver it, market and sell itto customers, distribute or provide it to those customers while ensuring necessary postsales service is completed. They also know that internal firm infrastructure activities suchas human capital development or procurement support the main stages in the value chain.What managers sometimes arent as knowledgeable of is the fact that the value chainwithin a firm or industry is actually comprised of a very specific model of performancethat depicts the discrete stages of organizational value creation. Further, they dontalways use the model to compare and contract activities across firms for the purpose ofdetermining where competitive advantages lie.

Developed in the early 1980s by Harvard Business School Professor Michael Porter inhis book Competitive Advantage, the value chain consists of two main components:primary activities and secondary activities.

Value chain analysis is a method for decomposing the firm into strategically importantactivities and understanding their impact on cost and value. According to Porter (1985,1990), the overall value-creating logic of the value chain with its generic categories of


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activities is valid in all industries. What activities are vital to a given firms competitiveadvantage, however, is seen as industry dependent. The value chain configuration is atwo-level generic taxonomy of value creation activities (Porter, 1985). Primary activitiesare directly involved in creating and bringing value to the customer, whereas supportactivities enable and improve the performance of the primary activities (for a similar two-

level activity categorization see also Kornai, 1971; de Chalvron and Curien, 1978;Stabell, 1982). The support label underlines that support activities only affect the valuedelivered to customers to the extent that they affect the performance of primary activities.Primary value chain activities deal with physical products (Porter, 1985: 38).

Primary activities:

The five generic primary activity categories of the value chain are (Porter, 1985: 3940):

Inbound logistics: Activities associated with receiving, storing, and disseminating inputsto the product.

Operations: Activities associated with transforming inputs into the final product form.Outbound logistics: Activities associated with collecting, storing, and physicallydistributing the product to buyers.Marketing and sales: Activities associated with providing a means by which buyers canpurchase the product and inducing them to do so.Service: Activities associated with providing service to enhance or maintain the value ofthe product.

The primary activity categoriesparticularly the inbound logisticsoperationoutboundlogistics sequenceare well suited to characterizing the main value creation process of ageneric manufacturing company. Casual empiricism suggests that manufacturing orprocess industry firms frequently use the value chain activity category vocabulary whendefining and describing their operations. Marketing is included as a primary activitycategory as these activities inform the customer of the relevant product characteristicsand ensure product availability on the market. Similarly, the inclusion of service as aprimary activity category follows from the fact that service can be critical for the valuerealized by the customer.

The set of generic activity categories is a template for identifying critical value activitiesthat provide a basis for understanding and developing competitive advantage from theperspective of the firm as a whole.

The value chain configuration is not meant to model the actual flow of production. Thevalue chain activity focus can be used for identification of strategic improvement needsor opportunities, but is not necessarily useful for specifying a reengineering of businessprocesses.

Generic activity categories are not the same as organizational functions. Related activitiesfrom a competitive advantage perspective can span several organizational functions. Asingle function can similarly perform activities that need to be distinct from a competitive


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advantage perspective. This is perhaps most apparent in the distinction between primaryand support activities.

A firms value chain is embedded in a system of interlinked value chains (Porter, 1985:34). This value system includes the value chain of suppliers of raw materials and

components. It also might include the value chain of distinct distribution channels beforethe product becomes part of the buyers value chain. The overall system is thus a chain ofsequentially interlinked primary activity chains that gradually transform raw materialsinto the finished product valued by the buyer.

Support activities:

The generic support activity categories of the value chain are:

Procurement: Activities performed in the purchasing of inputs used in the value chain.Technology development: Activities that can broadly be grouped into efforts to improve

product and process.Human resource management: Activities of recruiting, hiring, training, developing, andcompensating personnel.Firm infrastructure: Activities of general management, planning, finance, accounting,legal, government affairs, and quality management.The categories of support activities are not uniquely linked to the value creation logic of along-linked technology. The same categories of support activities should therefore berelevant to other primary value creation logics. Porter does not argue explicitly for hiscategories of support activities, and the taxonomy appears to follow pragmatically thetraditional functional organization of the firm, where support categories cover thosefunctions not included in the primary activity categories of the value chain configuration.

Value configuration diagram:

Figure 1 shows the generic value chain diagram. The sequencing and arrow format of thediagram underlines the sequential nature of the primary value activities. The supportactivities in the upper half potentially apply to each and all of the categories of primaryactivities. The layered nature of the support activities are apparently meant to tell us thatactivities are performed in parallel with the primary activities. The margin at the end ofthe value chain arrow underlines that the chain activities are all cost elements thattogether produce the value delivered at the end of the chain.

For the analysis and diagnosis of a particular firms competitive advantage, it is necessaryto identify the firms individual value activities using the generic value activitycategories. Figure 2 shows an example of the instantiated value chain diagram for acopier manufacturer with primary value activities (Porter, 1985).


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Figure-1: The value chain diagram of The Free Press, a division of Simon & Schusterfrom Competitive Advantage; Creating and Sustaining Superior Performanceby MichaelE. Porter.

Diagnosis of competitive advantage:

Allocating individual activities to generic categories is an analytical choice with strategicimplications. The same applies to the choice of activities that are considered for explicitenumeration.Value chain analysis is often limited to and summarized by the identification anddiscussion of strengths and weaknesses in terms of critical value activities (Hax andMajluf, 1992). A more detailed first-order analysis assigns costs and assets to the valueactivities.Second-order analysis requires a closer look at the structural drivers of activity cost andvalue behavior. The drivers are related to the scale and scope of the firm, linkages acrossactivities, and environmental factors. Cost and value drivers are often analyzedseparately.

First-order analysis:

The allocation of costs and assets to each activity can be used to assess the activities thatare the most important determinants of overall product cost. Comparing differencesrelative to competitors or other relevant benchmarks provides an indicator of competitiveadvantage and improvement potential.


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Figure-2: Value chain diagram for a copier manufacturer from The Free Press, a Divisionof Simon & Schuster from Competitive Advantage; Creating and Sustaining SuperiorPerformanceby Michael E. Porter

Obtaining reliable and accurate cost and value data for value chain analysis is difficult(Hergert and Morris, 1989). Traditional accounting data are most often not collected andreported in a fashion consistent with the needs of value chain analysis. As noted above,effective analysis for diagnosis of competitive advantage requires not only obtaininghistorical data, but also projecting trends and comparing results with similar data fromcompetitors.

Despite the inherent difficulties often encountered, first-order analysis is useful for anumber of reasons. First, value configuration analysis is useful because it promotes theright questions: what is the firms competitive position and how can it be sustained orimproved? Second, the awareness and commitment promoted by the process ofdiagnosing competitive advantage is often just as important as obtaining accurateestimates of costs and value. Third, the difficulty of obtaining a good understanding ofcost and value behavior for critical value activities is an indicator of causal ambiguity and barriers to imitation (cf. for example, Reed and De Fillipi, 1990). This difficultyunderlines the potential competitive advantage that might be obtained from effectivevalue configuration analysis.

Drivers of cost and value:

The cost behavior of value activities is determined by structural factors that are defined ascost drivers. Identification of structural factors provides a heuristic for assessing the costbehavior and cost economics of the value activities for a firm. The relative importanceand absolute magnitude of cost drivers will vary from industry to industry and from firmto firm. Exploiting and shaping these structural factors is a main source of competitiveadvantage.


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Drivers are partly related to internal relationships, partly related to external factors, andpartly related to the relationship between internal and external factors .Porter (1985) identifies 10 generic drivers: scale, capacity utilization, linkages,interrelationships, vertical integration, location, timing, learning, policy decisions, andgovernment regulations. All drivers of cost and value identified by Porter are potentially

relevant. However, their relative importance and role might differ across firms and, as weshall show, systematically across the three alternative value creation logics. The valuechain model promotes a heavy focus on costs and cost drivers (Porter, 1991). The maindrivers of value are the policy decisions that are made by product and segment choiceswhen the firm is established or is repositioned.

For the generic value chain, the major driver of cost is scale. Associated with scale is thestructural importance of capacity utilization. Internal scope relates to the degree ofvertical integration forwards towards customers and backwards into suppliers. Thompson(1967) argues that vertical integration is the primary means for chains to reduce controlcosts due to supply and demand uncertainty. Traditional economics of scale relate to both

economies of laborcapital substitution and learning. The other main drivers relate to theeconomics of both internal and external scope. Scope and scale have diseconomies thatfollow from the need for coordination due to non-perfect decomposition (Simon, 1982) ofthe activities of the firm.The primary activities of the long-linked technology have both pooled and sequentialinterdependence. There are, therefore, potentially significant cost and value drivers in theform of linkages across primary activities and with the primary activities of suppliers andcustomers.

Strategic positioning options:

The purpose of value configuration analysis is diagnosis and improvement of competitiveadvantage. Competitive advantage is relative to existing and potential competitors.Competitors are defined by product and market segment scope. A third dimension isscope in terms of value activities in the business value system of interlinked firms. This isoften referred to as degree of vertical integration. Strategic positioning for competitiveadvantage is therefore an issue of choosing position in terms of product scope, marketscope, and business value system scope. We suggest that the structure of the businesssystem is a function of the underlying value configurations of the firm. Or stateddifferently, there are unique value system scope options relative to the differentconfigurations.The appropriate choice of position depends on the drivers of cost and value. For firmswith a long-linked technology, relationships between scale, capacity utilization, marketscope, and uncertainty in input and output markets are the critical generic determinants ofthe appropriate strategic position. The drivers shape the business value system, theindustry, and thereby also the competitive position. Competitive position will also be afunction of where the industry is in the product life cycle.A position of competitive advantage cannot be chosen directly, but must rather beattained by appropriate actions in terms of scope and in terms of attempts to modify thedrivers of cost and value.


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Sustainable competitive advantage is determined by the nature of the sources ofcompetitive advantage. These are in part captured by uniqueness and non-imitability ofthe drivers of cost and value that underlie a position.The logic of the value chain implies an analysis of competitive positioning based onvariants of cost leadership. That is, the value chain framework has most to say about how

to achieve a cost leadership position. The overall flow logic of the primary activitiesdirect attention only to those Buyer Purchasing Criteria associated with improving theflow of the larger value system that includes buyers and suppliers.

Need For Value Creation Analysis:

Value creation provides an important linkage between the steps of the strategy process.The managers external analysis yields information about the companys customers andtheir willingness to pay for the companys products. The external analysis also gives the

manager information about the companys suppliers and their costs. This informationenters directly into the managers consideration of what value the company creates.

The managers external analysis also provides information about the companyscompetitors: their costs, their prices, and the products that they provide. This informationis very useful in determining whether the companys transactions with its customers andsuppliers create value in competition with other firms in the industry. Do the companyscustomers derive greater or lesser benefits from purchasing the products of competitors?Do the companys suppliers incur greater or lesser costs in serving competitors? Theseconsiderations will be important to the manager in evaluating what value the companyadds to the market.

The managers internal analysis is useful in determining what assets the firm has to offerthe market place. He or she uses the combination of internal and external analysis todetermine the benefits the companys assets add in serving customers and the opportunitycosts of using those assets. The internal analysis yields information about what types ofproducts the firm can provide to its customers. In addition, the manager determines whatactivities should be performed within the organization and what types of inputs will beprocured from suppliers. Together, this information helps the manager determine thepotential value that the companys products will create.

The concept of value extending from suppliers through the firm and on to its customers isrelated to but distinct from Michael Porters concept of the value chain. The value chainrefers to the firms internal processes. As Porter observes, Every firm is a collection ofactivities that are performed to design, produce, and market, deliver and support itsproduct. Porter emphasizes that each firms value chain is embedded in a value systemof activities composed of supplier value chains upstream and channel and buyer valuechains downstream. These external value chains complete the picture by including buyerbenefits and supplier costs.


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As part of the managers external analysis, it is useful to understand the manner in whichcustomers derive benefits from their products. This will help managers tailor their product accordingly. Although it is difficult to measure precisely what an individualcustomer is willing to pay for a good or service, some inferences are possible. Customersreveal something about their willingness to pay by their purchasing decisions. If

customers pay $150 for a product, their willingness to pay is at leastthat amount, but itmight be $175 or it might be $300.

Statistical techniques for estimating total market demand also provide information aboutthe total willingness to pay of customers in the market. When market prices fluctuate andtotal customer purchases change, companies get some indication of price sensitivity andcan estimate how much customers are willing to pay. Brokerage fees fell substantiallyafter deregulation. Customers were willing to pay hundreds of dollars per trade beforederegulation of brokerage fees in 1975, so it can be inferred that those customers vieweda trade as providing a benefit of at least that amount (at least when they made that trade).After deregulation, brokerage fees fell below that level but earlier rates provide some

guide to customer benefits per trade. With the advent of Internet securities trading, manycustomers were willing to pay about $30 per trade. As competition intensified, Internetbrokers began to charge $5 per trade or less. Those customers who traded online whenfees were over $30 had benefits of at least that amount per trade. Customers attracted toonline trading by the lower prices were likely to have benefits less than $30 and greaterthan $5.

More complicated inferences can be made by comparing bundles of products. Somecustomers trade with full-service brokerages at up to $150 per trade rather than withdiscount brokerages at $50 per trade. Those customers must perceive that they obtainbenefits of at least $100 from the services, over and above trade execution. In the sameway, customers who trade with a discount broker at $50, rather than going online at $5,obtain benefits from personal interaction at least equal to $45.

Also as part of the managers external analysis, it is useful to understand the costs of thecompanys suppliers. This understanding will help managers to determine the types ofproducts they should obtain from suppliers and the types of activities that the companywill perform itself. Managers are able to obtain information about the costs of theirsuppliers, especially if suppliers are willing to share cost information. Industry costestimates may be available if the suppliers employ standard production techniques. Inaddition, market prices for the products suppliers use allow inferences about suppliercosts. Managers can combine data on prices and standard industry markups to makeinformed estimates of supplier costs. Customer benefits and the costs of the firm and itssuppliers are the building blocks of value.


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An Exemplary Case of Value Creation:

KFC Corporation, based in Louisville, is the world's most popular chicken restaurantchain, specializing in Original Recipe, Extra Crispy, Kentucky Grilled Chicken andOriginal Recipe Strips with home-style sides, Honey BBQ Wings, and freshly made

chicken sandwiches. The company was founded as Kentucky Fried Chicken by ColonelHarland Sanders in 1952, though the idea of KFC's fried chicken actually goes back to1930. Although Sanders died in 1980, he remains an important part of the company'sbranding and advertisements, and "Colonel Sanders" or "The Colonel" is a metonymforthe company itself. The company adopted KFC, an abbreviated form of its name, in 1991.Newer and remodeled restaurants will have the new logo and name while older storeswill continue to use the 1980s signage. Additionally, Yum! Continues to use theabbreviated name freely in its advertising.

Every day, more than 12 million customers are served at KFC restaurants in 109countries and territories around the world. KFC operates more than 5,200 restaurants in

the United States and more than 15,000 units around the world. KFC is world famous forits Original Recipe fried chicken -- made with the same secret blend of 11 herbs andspices Colonel Harland Sanders perfected more than a half-century ago. Customersaround the globe also enjoy more than 300 other products -- from Kentucky GrilledChicken in the United States to a salmon sandwich in Japan.

KFC stands for high quality fast food in a popular array of complete meals to enrich theconsumers everyday life. KFC strives to serve great tasting, finger lickin good chickenmeals that enable the whole family to share a fun. Uninhibited and thoroughly satisfyingeating experience, with same convenience and affordability of ordinary Quick ServiceRestaurants.

Transcom Foods Limited, a concern of Transcom Group is the franchisee of KFC inBangladesh. The first ever KFC restaurant has been opened in September at Gulshan,Dhaka with a seating capacity of 178 persons. In the coming days, KFC plans roll outmore restaurants in Bangladesh

Types of Restaurants

Most Kfc restaurants offer both counter service and drive-through service, with indoor

outlet. All the restaurants are situated in the central areas of the country. In somecountries, KFCs locations are near highways offer no counter service or seating. Incontrast, locations in high-density city neighborhoods often omit drive-through service.There are also a few locations, located mostly in the long beaches abroad.

To accommodate the current trend for high quality,KFC is offering a variety of foodmenu like special sandwitches,KFC special bowls, plated meals besides KFC specialfried Chicken.operating segment.
http://en.wikipedia.org/wiki/Kentucky_Colonelhttp://en.wikipedia.org/wiki/Harland_Sandershttp://en.wikipedia.org/wiki/Metonymhttp://en.wikipedia.org/wiki/Metonymhttp://en.wikipedia.org/wiki/Kentucky_Colonelhttp://en.wikipedia.org/wiki/Harland_Sandershttp://en.wikipedia.org/wiki/Metonym


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HOW AN ORGANIZATION CREATES VALUE

Organization input

Organizations InputsOrganization obtains inputs from itsenvironmentRaw materialsMoney and capitalHuman resourcesInformation and knowledgeCustomers of service organization

OrganizationsConversion ProcessOrganization transforms inputs andadds value to themMachineryComputersHuman skills and abilities

OrganizationsEnvironmentSales of outputs allow organization toobtain new supplies of inputsCustomersShareholdersSuppliersDistributorsGovernmentCompetitors

Organizations OutputsOrganization releases outputs to itsenvironmentsFinished goodsServicesDividendsSalariesValue for stakeholders


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Raw Materials: Fresh Chicken supplied by Aftab poulty.Human resources: Presently 30 students are working.Information and Knowledge: Collected locally.

Organizations Conversion ProcessMachinery: All the machineries directly come from the USA.Human skills and abilities: Effective and efficient manpower is the strength of thecompany.

Organizations OutputsFinished goods:

Wraps, salads.

Chicken pieces

Sandwiches.

Grilled Chicken.

Side Dishes.

Deserts

Premium Chicken Sandwiches

Snack Wrap

Chicken Fajita

Chicken Selects

The Happy Meal.

Filet-O-Fish.

Organizations Environment

Customers: Upper middle classSuppliers:Aftab poulty firm, The USACompetitors:Broast caf,Pitstop,Mfc,Afc.

Conclusion:


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The path to value creation requires that economic profits be earned. In order to ensurethat economic profits are being earned, the same type of capital budgeting analysis usedto evaluate new investments must be applied to the existing assets and operations of thegoing concern business. This process is vital not only to forming a coherent strategy for

the future, but to prioritizing management resources as well.Value creation is a never-ending cycle. It begins with modeling business operations, prioritizing areas for more detailed investigation, identifying opportunities forimprovement, implementing the changes required to maximize success and themeasurement and revision that starts the process over again and allows management tostay abreast of company and market changes.Value creation analysis is a critical but often overlooked component in the financialmanagement of every company. Without this type of inspection, value will not be createdat the maximum pace.

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