EIRMA/01.172 July 2001

EIRMA ROUND TABLE MEETING

VALUE CHAIN MANAGEMENT

21/22 June 2001 IBM Europe, Rüschlikon, near Zürich

Chairman

Matthias KAISERSWERTH Director, IBM Research Division

IBM Europe Copies of individual presentations given at this Round Table are available via the members’ corner of the EIRMA web site, www.eirma.asso.fr/members. A user name and password are required to access this area : members - innovate.

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Procedural Summary Round Table "Value Chain Management"

As manufacturing moves to low wage countries, competitiveness of companies in Europe is often maintained through the massive introduction of robotics, through moving up the value chain or through taking on additional bits of the value chain, hitherto either not recognised or not considered to be the domain of the company. On occasion, entirely new elements can be added to the value chain, such as specific services hitherto not available. The Round Table was to look at the role of R&D in the management of the value chain.

e-Business and Managing the Value Chain The Chairman, Dr Matthias Kaiserswerth, looked at the value chain from the point of view of what IT, the inter-/intra-net, and e-business can contribute to it. He gave an overview of the systems such as Material Requirements Planning (MRP), and Manufacturing Resource Planning (MRP II), and Enterprise Resource Planning (ERP) for managing the internal value chain chain. From the customer's viewpoint, the value chain is a supply chain, defined as a series of value adding activities. Similarly, from the supplier's viewpoint it is a demand chain. Sitting somewhere in the middle, it can be one or the other. The total value chain appears when looking at it from the outside. Both ends have their integrated information systems (SCM = Supply Chain Management and CRM = Customer Relations Management).

The value chain is supported by IT layers and by logistics and physical layers, starting with the raw inputs, and ending at the customer. Within this value chain, there can be several intermediate value chains representing successive supplier-customer relations. In many cases the one way relationship Marketing - Purchasing will by now be replaced by inter-relationships between the various functions of the two companies involved, impacting on many business processes such as Strategic Planning and Design, Business Planning, QA and TQM, Accounting and Billing, MRP, ERP, Knowledge Management (KM), Electronic Commerce, etc.

For example e-business, which today supports many value chains or at least part of them, can take place between different businesses (B2B), between Government and customers (G2C), between different consumers (C2C), and between businesses and consumers (B2C), and all of this can happen within the same value chain. The B2B component is expected to increase exponentially and could be worth up to $ 7 trillion by the year 2004. e-Business leverages technology to redefine the business. It maximises efficiency across the organisation and supports business model changes. e-Business sophistication has gone through the stages of simply publishing products and services through transactions, integration, value networks, to the digital economy, which is where the economy is ultimately heading. The large firms start the trends and the medium and smaller firms follow. New players and some traditional ones may wish to be part of value networks, i.e. go for inter-enterprise integration, rather than first going through the process of full internal integration of digital processes and thus perhaps adopting systems that are not optimised for inter-enterprise integration.

Current trends have led to the creation of e-markets, within which the inter-company supply chains can be managed flexibly, integrating the horizontal supplier-customer relationships. This is expected to drive down search and transaction costs and to lead to perfect competition. These e-markets have shot up like mushrooms, but the economic slowdown has led to a consolidation from 1500 last year to less than 350 today. The fundamental problem was that the business model was wrong: perfect competition is not sustainable. With perfect

information, prices are driven down to the lowest possible level and beyond almost instantly and therefore suppliers are not motivated. However, 2nd generation e-markets, such as Covisint, E2Open, and Transora have emerged, the rationale not necessarily being to squeeze prices, but rather to get quality for money. In order to be successful, collaboration across the value chain and extended services must be re-enforced, and win-win situations must be sought. From the point of view of infrastructure, there will be great demand for integration middleware, translation hubs, and industry specific document type definitions.

As e-Business is becoming part of the value chain, there will be more emphasis on services than on goods, and these will have to be increasingly dynamic and complex, as shown in the Cross Flow Scenario (see web Annex 1).

Dr Kaiserswerth surmises that in the future competition will shift from businesses to value chains. You will be better off at the intersection of several value chains than in the middle of a single and very long value chain, which can make you vulnerable to fluctuations of the overall value chain.

Method for Value Chain Analysis Hindrik Öunpuu looked at the components of the value chain and compared the concept of a chain with that of a network or web. Each value chain has its proper environment, it will be different for different product categories, distribution channels, and trading partners and alliances. Whilst the Chairman surmised that in future not businesses, but value chains will compete, the speaker saw not products but business models compete in the future. Business models are influenced by the business environment, such as regulation taxes, user interfaces, supply interfaces, economics, market trends and technology roadmaps. Whilst the old world was confined to its four walls, held up positional power, was vertically integrated, predictability was important and companies were centralised, the new world is distributed, responsive and flexible, deregulated, enterprises are extended; focus is on core competences and the customer, and on partnership between management and employees.

Driving forces in Ericsson's business are: bandwidth (from 1.2 terabits/second in 1996 to 99.8 terabits in 2001), transistors per microprocessor (from 0.03 million in 1980 on the 8086 microprocessor to 9.5 million in 2000 on the Pentium III), and the cost per megabyte of DRAM memory, which is going down dramatically (from ~$ 7 in 1990 to an estimated $ 0.05 in 2005). Other examples are transaction costs, which have decreased substantially when done over the Internet. The "old" computer industry, which provided mainly hardware, increased revenue tenfold (from $ 80 billion to $ 800 billion) in the space of 18 years by including software, solutions, and networks. It is expected that the web will enable the "new" computer industry to again increase revenue tenfold by 2012. The customer expects and will get more customisation. The value chain will become a value network or value web. Nevertheless, analysing the value chain remains important. For example the internal value chain can be down from the company level to the level of core competences, core processes, core sub-processes, and finally skills and activities.

Globalisation, new business channels, mergers and acquisitions, developments in different time zones require configuration management, which is about managing the evolution of software and hardware development and maintenance practices and their components as they change aver time.

In addition to the internal value chain, there is the external value chain, comprising manufacturers, business partners, suppliers, distributors, retailers, resellers, etc. Moving from the value chain to value networks implies supplier collaborations in product development, exploring new channels, managing changing supplier relationships, and trading nets. Companies are teaming up to pool their expertise, enter new markets, share financial risks, and accelerate time-to-market. However, it is important to choose the right partner. New market channels provide for round the clock and global access, personalised services and real-time transactions. They are for communities of interest.

Before giving business examples (see web Annex 2), Hendrik Öunpuu concluded that you must have a clear understanding of your value chain. New business models will compete in new market channels. New product introduction will be faster and mostly on-line. You will find new partners on your way up the value chain. The supplier base will decrease but new distribution channels and customers will emerge and suppliers will increasingly act globally. There will be more risk and benefit sharing with alliance partners.

The business examples included Cisco, which had successfully moved up in the value chain by leaving a large part of the manufacturing to contractors and concentrating on core processes such as product design and innovation. Sun Microsystems simplified sales through the net, which drove down cycle times and drove up sales productivity to twice the previous level. Dell gained substantial income (almost $ 1 billion) from build-to order manufacturing, and Hewlett Packard attained cost savings of $ 0.6 billion through "Supply Chain Governance".

IBM contribution Simon Field of IBM demonstrated an IBM pilot portal for car insurances. It can be used by insurance companies that can introduce their own specifications, and by customers for insurance shopping. Thereafter the participants were shown some of the latest technological innovations at the IBM show room.

Integration and role of R&D in Value Chain Management Nicola Redi looked at the innovation process, starting with inputs such as customer needs and wants, product opportunities, know-how leverage, and company technology and skills, ending with the output "customer value". The various well-known phases in-between (see web Annex 3) are supported by management processes. The classical key success factor was: "the only sustainable source of competitive advantage is a superior process for innovation" that usually starts out with competitive intelligence and the intellectual resources of the company which then combine into knowledge and creativity, leading into the innovation process and from there on to the development and industrialisation process to commercialisation. However, the competitive scenario is evolving: globalisation and mass customisation require fast decision-making and thus availability of KL to decision makers when it is needed. Virtual teams and the Internet are the new essentials.

e-Business can add value to the value chain by reducing transaction costs and by totally integrating the supply chain from the idea generation to the final customer. E-Architecture is more than the integration of internal systems, it enables interaction with potential users, customers, partners, suppliers - anywhere and with any system.

Value chain management starts with business objectives and processes and is about sharing and integrating information along the value chain. It requires analysis and redesign of workflow, definition of workflow content, and identification of the best mix of IT tools.

The new key success factors in the innovation process are: speed of the innovation transfer, Time –to-Product, Time-to-Market, adaptability and flexibility of processes & organisations, integration of Core Competencies and Knowledge on one hand and Innovation and cost strategies on the other. As a result, changing market requirements and evolving technologies can be incorporated fast into the design until the last possible moment before a product is introduced into the market. The new product development process "e-volves" from here with fast and flexible R&D processes, efficient integration of all resources, and development of centrally co-ordinated information platforms. Company value is generated through knowledge and information. All company processes involved in the innovation development are no longer sequential or parallel, but interfacing.

Data and information for all segments of the value chain will be accessible through integrated portals at the desktop, providing a single interface which links the user to the relevant data. At Pirelli, the project management process, which is fully integrated with other processes such as idea screening, knowledge management, and the portfolio management process, is available on the portal. Related tools accessible from the portal are "planning", "deliverables", and "follow-up". The portals integrate the knowledge at different value chain intersections. The integration of the portals integrates the value generation throughout the whole value chain.

The speaker illustrated how R&D integrates into the supply chain, showing how business strategy, competitive scenarios, Competitive Intelligence, Technology Watch, Benchmarking, Knowledge Management, operational units, the customer, etc. relate to R&D. The next giant step is the digitalisation of the processes so as to obtain e-R&D, Technology e-Monitoring, and Process e-Integration. "To get a better flow of information and develop the right processes and strategies, companies need a digital nervous system that will help them to better understand their business and act more effectively on that understanding." (Bill Gates)

Participants wanted to know who funds the e-effort. It is a corporate initiative and therefore initially funded by corporate R&D. When it works and is accepted by the BU's, they fund it themselves. Furthermore, it was interesting to know whether there could be a generic model for value chain management as has been established for project management (EIRMA WG53). It was felt that value chain management was too much dependent on the industry sector and probably even the company.

Sharking Innovation: Towards New Value Chains Dr Math Kohnen looked at the value chain from a rather different perspective (see web Annex 4). He said that the value chain is often visualised as a linear and sequential process - a mental straight jacket. Finding new bits of the value chain requires unorthodox lateral out-of-the-box thinking. Shell has introduced a Stage-Gate like process for selecting unusual ideas that can lead to incubation and from there to ventures and finally New Business. The front end is occupied by the "Game Changer". In the middle, BU's, the Venture Unit, EXCOM, and R&D are involved. The seven steps involved to get an idea though to a viable business proposal are: 1) thousands of idea submissions at any time, 2) first tollgate with peer revision, 3) test and mature, 4) expert review, 5) second tollgate with value proposition, 6) technical feasibility, 7) a viable business proposal passes the third tollgate.

Essential attributes of the "Game Changer" (the intrapreneur who takes on a promising idea) are: Peer reviews, resources, a rolling budget, intrapreneurship, speed, experiments, a grassroots driven process, and nurturing the process. The process is driven by the bottom and sponsored at the top. Entrepreneurship is sometimes more important than new ideas – so give the entrepreneurs a fair stake. The enabling infrastructure is crucial and paying your new ideas should not entail cutting resources elsewhere.

With this brief introduction to the innovative incubator system at Shell, Math Kohnen described three projects: energy from geothermal, water from oil deposits, from washing powder to washing service. Whilst the geothermal project was rather more technical, the water from oil production was a real out of the box idea: in oil production, water is a real problem. In most cases an oil well produces more water than oil, and the water must be separated anyway! So, why not use the water in arid regions for water supply to local populations. The third idea was one where the value chain was followed up beyond what the industrial customer was doing with the washing powder, which is essentially branding and perhaps blending with other ingredients. The final customer is the often-working married or single woman, or the working married or single man, who does not relish starting washing when coming home from work. So why not set up a big washing centre for these people and offer them a washing service. The first of these centres have been set up in the USA and the first encouraging results are coming in.

This presentation triggered a lively discussion: • These very interesting projects distract from the core business. How do you deal with

this issue? – You need top management support! Top management understands that in a mature business such as the oil business, if you want to have more than 10% growth, you must be innovative.

• How do you convince your people that your disruptive technology will give you an adequate return? – The Game Changer pushes the idea down and that is accepted.

• Why not leave the money returned from those ventures that made it to the venture fund so they can fund new projects. – This is not necessary since the Game Changer gets continuous funding. Important is that the intrapreneur is behind the idea and then he gets all the trust and support he needs. The game Changer must be the example entrepreneur. He has the task of getting people released for his project. The tools are only there as a support.

General Discussion

• We lack a generally accepted definition of the Value Chain. Has it to do with market analysis? Is it external or internal? Is the supply chain? – The Chairman surmised that it is probably a bit of all of this. However, scientists may not be overenthusiastic when looking at the market or Marketing for that matter.

• It is also a question of internal or external technology.

• It is extremely interesting to look into the question of how to create new value chains.

• Another important question is where you earn your money in the value chain. Is it with the end-product or elsewhere?

• We should look at R&D's role (together with Marketing) in the management of the value chain. Looking into the supply chain for creative value chain management may not be appropriate.

• There should be quite a bit published on the subject. However, there should be scope to look into the white areas of the subject. When the new activity is non-core, do we have to adapt our core competences to the new activity? Probably yes, or else outsource the competence.

• An interesting approach would be to collaborate in parts of your value chain with someone else and learn from him. You could then create a new service or product out of this learning.

• On the other hand, you could see yourself as a true innovator and/or system integrator. You could your self create new value, not take it away from others.

The general consensus was that EIRMA should set up a Study Group to explore this subject further. For a number of people it was still fairly new and little experience was available! The Study Group should have a go at clearly defining the term "value chain" and explore where R&D in this value chain can add more value either by moving up the chain and take business away from others, or by moving laterally (out-of-the-box thinking) and add truly new value, or by integrating the value chain so that the whole becomes more than the sum of its parts.

EIRMA ROUND TABLE MEETING VALUE CHAIN MANAGEMENT

F. Bourgoin France Télécom R&D Responsable du Plan Stratégique

Prof. J. De Stigter Swisscom Manager Security & Service Management

Dr. W. Gehrisch EIRMA Deputy Secretary General

Dr. L. Haspeslagh Atofina Research Global Analyst, Petrochemicals R&D&T

H. Kaikkonen Fortum Group Vice President, Strategic R&D

Dr M. Kaiserswerth IBM Europe Director

Dr. M. Kohnen Artesian

M. Köpperschmidt Deutsche Telekom AG Group Innovation Management & Monitoring

G. Landén Volvo Technological Development Business Development & Analysis

O. Lanz ABB Corporate Research Deputy Director

H. Öunpuu Ericsson Telefonaktiebolaget Senior business analyst

J. Pettersson Ericsson Telefonaktiebolaget Business research and analyst

Dr. F. Prechtl BASF Aktiengesellschaft R&D Planning & Controllling

N. Redi Pirelli SpA Project Planning Manager

Dr. W. Rutsch Ciba Specialty Chemicals Head of Corporate Technology Office

J. Scoyer Union Minière Innovation Manager Dr. K. Stansfield TRW Automotive Business Development Manager

Dr.ir. W. Van Vooren Bekaert S.A. R&D Technology Manager