Many companies are considering a Business Architecture (BA) initiative as part of their corporate strategy. While researching and analyzing the BA, they are rediscovering Michael Porter’s value chain. Many find this reawakening quite logical, while some may get confused between the terms; value chains and value streams. This article will provide an explanation and synthesis of these remarkable and enlightening concepts. First, I will clarify and define the basic terms so that I can explain their architectural relationships.
The Enterprise Business Architecture defines the enterprise value streams and their relationships to all external entities, other enterprise value streams, and the events that trigger instantiation. It is a definition of what the enterprise must produce to satisfy its customers, compete in a market, deal with its suppliers, sustain operations, and care for its employees1. While this definition has not been formally adopted, it fits well with architectural disciplines.
A Value Stream is an end-to-end collection of activities that creates a result for a customer. The value stream has a clear goal: to satisfy or to delight the customer2. This is a well known term, familiar to both Six Sigma and Lean Manufacturing disciplines.
A Value Chain disaggregates a firm into its strategically relevant activities in order to understand the behavior of costs and the existing and potential sources of differentiation. It enables the firm to gain a competitive advantage by performing these strategic activities more cheaply or better than its competitors3. The firm seeks cost leadership or differentiation, but not both. Here again, another well know term and key strategic concept perhaps enjoying a renaissance.
As you can see from these basic definitions, the BA is composed of integrated value streams. This new organizing principle for the enterprise has changed or evolved up from the rudimentary subjective classifications of functional processes to a new and expanded integrated value stream model. The Business Architecture provides a customer centric view of the enterprise, a view obscured by typical functional classifications. While many companies strategically desire a customer centric enterprise, achieving this goal without the value streams integrated in a Business Architecture is difficult. The enterprise needs a structure that is integrated and cross-functional in nature, with a focus on measurable outcomes that are important to its success and the success of its customers. The BA does not ignore the internal organizational relationships associated with the functional classifications; it just puts the customer first along with what the enterprise produces of value in its marketplace.
With a Business Architecture built with integrated value streams, you can build a value chain as defined above. For example, looking inside a typical mid-size, “build-to-order” manufacturer, you will find the following sixteen value streams:
- Prospect to Customer
- Order to Cash
- Manufacturing to Distribution
- Request to Service
- Insight to Strategy
- Vision to eBusiness Enterprise
- Concept to Development
- Initiative to Results
- Relationship to Partnership
- Forecast to Plan
- Requisition to Payables
- Resource Availability to Consumption
- Acquisition to Obsolescence
- Financial Close to Reporting
- Recruitment to Retirement
- Awareness to Prevention
Each value stream contains several integrated components. For example, in the Order to Cash value stream, you have four integrated components: Fulfill Order, Change Order, Review Order and Return Order. Some of these value stream components are the building blocks for a value chain. A value chain is not a collection of independent activities but a system of interdependent activities. Michael Porter first wrote about value chains back in 1985. His timeless ideas are enjoying a revival, perhaps having been forsaken by the focus on the explosive growth of the Internet during the past several years. A value chain is fundamental to the strategy, not an option merely for consideration.
The value chain and value stream are different just as illustrated in the earlier definitions. A value chain is more complex than a value stream and generally composed of value stream components. The most important differentiator is their purpose! As just defined, the value stream has a clear purpose; to delight the customer. The value chain has a clear purpose; to gain a competitive advantage. And both are important strategic elements. It is far more difficult to effectively and efficiently achieve the demands of a business unit’s strategic initiatives without a well defined value chain and value streams.
Before building a value chain, you must understand the five primary activities described by Michael Porter. In any firm all the categories of primary activities will be present to some degree and play some role in competitive advantage4. If you link value stream components or building blocks by the five primary activities described in a value chain, you will realize the following:
1. Inbound Logistics are activities associated with receiving, storing, and disseminating inputs to the product.
- Replenish Raw Material (from the Manufacturing to Distribution value stream)
- Submit Purchase Order (from the Requisition to Payables value stream)
2. Operations are activities associated with transforming inputs into the final product.
- Build Product (from the Manufacturing to Distribution value stream)
3. Outbound Logistics are the activities associated with collecting, storing and physically distributing the product to buyers.
- Deliver Order (from the Manufacturing to Distribution value stream)
4. Marketing and Sales are those activities associated with providing a means by which buyers can purchase the product and inducing them to do so.
- Fulfill Order (from the Order to Cash value stream)
- Grow Customer Base (from the Prospect to Customer value stream)
- Determine New Products (from the Concept to Development value stream)
5. Service activities are associated with providing service to enhance or maintain the value of the product.
- Provide Field Service (from the Request to Service value stream)
Unless you are familiar with a build-to-order manufacturer and its Business Architecture built with integrated value streams, visualizing the value chain is difficult, so Figure 1 is provided for examination. In order to simplify the illustration, only collaborations between value stream building blocks are illustrated rather than all of the detail associated with the exchanges of inputs and outputs, and other interdependencies. Please consider that this is a high level overview of a complicated concept.
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Figure 1
From the value stream perspective, the “build-to-order” manufacturer’s customers are delighted with the rapid fulfillment of their orders (Marketing and Sales), the enterprise’s ability to build quality products (Operations) and the on schedule delivery of their completed orders (Outbound Logistics). This optimizes the customer’s sales potential. By providing field service at the customer’s location the “build-to-order” manufacturer keeps their product in a higher state of operational readiness (Service).
The meticulous management of raw material inventory and the timely replenishment of the “build-to-order” manufacturer’s raw materials are based on actual product demand rather than estimated sales (Inbound Logistics). This has other benefits; it reduces the enterprise’s inventory costs, improves profitability, and enables the rapid fulfillment of orders. The vendors and suppliers are also happy about their relationship with the “build-to-order” manufacturer for similar reasons and may give them preferential treatment.
Oh, by the way, we are not finished! Other opportunities exist with other value stream components. For example, if the “build-to-order” manufacturer collaborates closely with their customers to determine which new products to manufacture, this will improve the relationship with their customers and will increase the chances of successful new products. The expected outcomes are increasing orders for the “build-to-order” manufacturer and declining orders for their competitors (Marketing and Sales). As you can see this expands the value stream integration, relating new product development to stimulating customer demand and reasonably completes the primary activities of the value chain. These kinds of results are typically demanded from strategic initiatives.
And then it just keeps getting better! From the value chain perspective, if the “build-to-order” manufacturer can harness the potential of value stream integration in this value chain, then they may achieve a competitive advantage; one of rapidly fulfilling customer orders supported by raw material inventory managed at just-in-time levels. While this is an “old news” approach, rapid fulfillment of customer orders; with all of the new and emerging industry segments in the 21st century, this “tried and true” technique may gain a competitive advantage in these new markets. Strategically, this opportunity for the “build-to-order” manufacturer may differentiate them in their ever changing marketplace.
While the classifications of functional processes are useful for other purposes, it is inadequate for expressing connectivity in an architectural model. This classification rarely represents an integration of processes with a customer centric view. Realizing that by definition, the BA is customer centric and represents the integration of enterprise value streams, you can design and build Michael Porter’s value chain from the architectural components defined in the BA. However, optimization and exploitation of the value chain may require enhancements to particular value stream building blocks in order to meet strategic expectations. This neither conflicts nor interferes with value stream improvement; rather it balances the two concepts by providing strategic opportunities for delighting customers while achieving a competitive advantage.
References:
1. Ralph Whittle and Conrad B. Mryick, Enterprise Business Architecture: The Formal Link between Strategy and Results (CRC Press 2004), page 31. 2. James Martin, The Great Transition: Using the Seven Disciplines of Enterprise Engineering to Align People, Technology, and Strategy (American Management Association 1995), page 104. 3. Michael E. Porter, Competitive Advantage: Creating and Sustaining Superior Performance (The Free Press 1985), pages 33-34. 4. Michael E. Porter, Competitive Advantage: Creating and Sustaining Superior Performance (The Free Press 1985), page 40.
