Introduction
Such concept as value chain management was first introduced by Michael Porter (1985), who tried to develop strategies for enhancing performance of the enterprises and increasing their profitability. This notion includes the following parts: product design, procurement manufacturing process, marketing and consumption recycling (Kaplinsky & Morris, 2001, 8; Prajogo et al, 2008, 615). This report aims to discuss the connection between value chain and quality management. In particular, it is necessary to analyze this issue from several viewpoints: customer and business process perspectives. This will enable us to get more comprehensive understanding of this topic. On the whole, we can argue that quality management plays an important role for each business process because all of them can shape the price of the commodities. This analysis will focus on such issues as the key factors, influencing clients perception of the product value and their relation to quality control. Furthermore, it is necessary to show how the principles of value chain management are implemented in various industries: namely we need to show which components of the chain value are most important to companies, especially their quality policies. Finally, we need to illustrate the methods, which can improve the quality of production. We are going to discuss such model as TQM (Total Quality Management), worked out by William Deming. This particular strategy has been chosen for this discussion as it covers practically each link of the value chain. We need to point out that it was primarily designed for such company as Toyota, which needed to pay special attention to each link of value chain. This is why TQM is so relevant to this discussion.
The importance of quality control as a part of value chain management
Currently, many enterprises proclaim themselves to be customer-oriented and do everything in order to live up to this reputation. Their key task is to ensure that each of their business processes like logistics, research and development, design, production, marketing and service are of the highest standard. This policy is supposed to attain two goals: 1) to add value to the products (or services) they sell and 2) to maximize the satisfaction of their clients. Finally, the management seeks to reduce operating expenses of the firm a minimum. Certainly, now these ideas seem to be self-evident, however, they were first implemented only in eighties by Japanese automobile manufactures. Such international giant as Toyota adopted this model, TQM, developed by William Deming (Mangan et al 2008, p 39). With time passing this approach has grown extremely popular and nowadays the representatives of various industries utilize it. The key benefit of TQM is that it addresses each component of value chain and helps to produce a product which is held in high esteem by manufactures and buyers. In theory, this goal must be set as a standard for every enterprise; however, this norm would be very difficult to meet because TQM cannot be fully utilized without shift in organizational structure and culture which have already been formed. It is usually easier to adopt this strategy in new and relatively small businesses because large corporations are less mobile. The transformation is more time-consuming. Still, despite this shortcoming Total Quality Management (or its variations) is usually actively applied in modern corporations.
The benefits of value chain management and quality control can also be explained by examining the principles of price determination. There are several approaches to this task: cost-plus pricing, rate of return pricing and value-based pricing (Webster, 1995). Currently, the management of leading companies gives preference to value-based pricing, which means that the price of the product is determined according to its perceived value for the buyer. In other words, they need to know how much money the client is ready to pay for goods and services. We need to emphasize an idea that such strategy is usually much more profitable than cost-plus pricing that is based only the cost of production. At present the majority of leading corporations adopt this approach; they may belong to various areas of business: 1) information technologies (Apple, Microsoft, HP) 2) automobile industry (Ford, Mercedes, Morgan, Aston-Martin); 3) manufactures of wristwatches like Rolex. These examples are not numerous, but they prove the idea that it is possible to charge a price, which far exceeds operating expenses. The aforesaid enterprises have achieved such success because they long ago realized the importance of value chain management.
Elements of value chain and quality control
Procurement
Enterprises, which seek to add an extra value to their product, never try to cut operation costs at the expense of suppliers. The quality of raw materials significantly affects manufacturing process and marketing strategies (pricing policies, advertising). This issue is great relevance in many areas of business; one of them is textile industry. The manufacturers of clothes such as Nike, Adidas, Gucci, et al choose suppliers according to such criteria: 1) their ability to meet ecological standards, colour homogeneity (absence of shadows,), physical parameters (reaction to dry or water cleaning, ironing, perspiration etc). This enables them to minimize the possibility of defective goods (Romano & Vinelli, 2001, p 450). More than that careful choice of suppliers makes their clothing more attractive to the buyer, who thinks that it is worth the price that he/she pays for it. This evidence indicates that quality control during procurement stage is essential for value chain. According to William Deming who attempted to put the tenets of TQM into practice: the tendency to select low-cost suppliers usually leads to many losses: such as outcast goods, the decline of sales rates and possible lawsuits against the firm (2000, p 28). This is one of the reasons why the companies should avoid mere pursuit of profits, which yields only short-lived results.
There are other enterprises, which attach primary importance to supply chain: food and drinks industry, the manufactures of pharmaceutical products, airline industry and other fields. The thing is that over recent years customers become more aware of such concept as CSR (corporate social responsibility), which means that the firm must also serve for the benefit of the community, save from pursuing its commercial interests (Kotler & Lee, 2005). They are more interested in the quality of the item, rather than its price. Certainly, such trend is more common in advanced countries, like the United Kingdom, the United States, Germany, France but it gradually becomes more prominent in other states. It has to be acknowledged that while selecting suppliers of the raw materials the management must always seek the best price-quality ratio. Under some circumstances, firms can refuse the services of some suppliers even if they provide high-quality materials due to the fact these materials are too expensive. Yet, such a scenario is not very widespread. In the modern economy, firms do not usually cease relations with a supplier with whom they have dealt for a long period of time. Those managers, who prefer to spare money on procurement, believe that these expenses do not break even. The main fallacy of such philosophy is that it neglects the idea the perceived price of the product can be much higher than the cost of production.
Marketing
Another important component of value chain is marketing, which shapes the relationships of the company with its clients. Many scholars emphasize such components of marketing as design and post-delivery services (Prajogo et al, 2008, p 620). During the design stage, the developers of the product must take into account customers expectations. They need to find out which characteristic is most important for the buyers; it can be functionality, durability, physical outlook, reliability, user-friendliness or all of them. For this purpose, enterprises can conduct customer surveys or interviews. This is one of the best ways to add value to a commodity. We can mention several cases, which substantiate the importance of design; one of them is IT sphere (Tayntor, 2007). For example, such corporation as Microsoft studies the suggestions or complaints made by the users. Furthermore it even encourages them to make recommendations. The same can be said about Adobe, Hewlett Packard, Apple and others. Testing procedures are supposed to ensure that the solutions (either software or technologies) are convenient in use and can be easily tuned according to clients needs. In-depth examination is one of the reasons why the products of these companies enjoy such demand among consumers.
Post-delivery service is another component of marketing which adds value to goods and commodities. Prior to deciding whether the product is worth purchasing or not, buyers take into consideration such factors as guarantee maintenance, guarantee period, serviceable life, indemnity received by the customer. There is another interesting detail of post-delivery services: according them the customers may judge about the quality of the products. For example, if the company provides a three-or-four year guarantee period, it eventually suggests that their goods are of the highest standard. In contrast, a one-year guarantee period may give rise to the belief that this product is unreliable. So, post-delivery service can have a profound effect on the purchasing decisions, made by the customers.
The value of a product can also be increased by advertising, which is intended to make people aware of the product or service and, most importantly, to compel people to buy it. No one can deny the significance of policy. But perceived value that has been created in this way usually diminishes if the product does not live up to the expectations of the customer. The impression, produced by advertising is very volatile. Advertising can only attract attention of the buyer; it may make him/her purchase the product once. However, such form of promotion cannot possible convince the customer to buy this article once again. Therefore, it is not very prudent for companies to rely on advertising as the sole means of value creation. In this respect, it should be noted that a very effective method of value-adding is word-of-mouth advertising; because it usually takes the form of recommendation, and it is not as obtrusive as conventional commercials. From the perspective of the average customer, it is more trustworthy. Word-of-mouth advertising can immensely boost the growth of small businesses. But this can happen only if the firm distinguishes itself for the quality of its products.
Research and Development
It should be noted that the quality of the product is measured not only by its functionality, durability but also by its novelty. Leading firms try to develop innovative solutions which would appeal to a wide target audience. This is one of the most important components of value chain. This is why they spend enormous amounts of money on research and development or R&D as it is also known. This practice is widespread in the spheres of information technologies, pharmacy, electronics, agriculture, genetic engineering and so forth. We may remember several cases when the novelty of the product was the key factor determining its price. For instance, when such company as TiVo created their first digital video recorder, consumers regarded it as a breakthrough and they were ready to pay money for it. However, afterwards other corporations like Apple or Microsoft launched mass production of DVRS, their price began to decline, simply because these devices were no longer so original (Lamb et al, 2004, p 523). Similar tendencies could be observed in mobile technologies in early nineties. Of course, we cannot presume that continuous innovation is a guarantee of success. The problem is that buyers usually receive innovative products with some apprehension and it takes a considerable amount of time before they became popular. Moreover, at the first glance, their usefulness may not be obvious.
But even despite this limitation businesses throughout the globe attempt to create innovative products. But there is a very curious tendency that has recently emerged: some firms only try to style their goods as innovative while in fact they have no such property. Normally, such projects heavily rely on well-staged advertising campaigns. The buyers are made to believe that the products, which are purchasing, constitute some breakthrough. One may remember recent commercials promoting such brand as Gillette. They underlined the idea safety razors manufactured by this firm, exemplified the most cutting edge technologies. For a short while it may add a value these goods, but it will soon swindle.
The importance of R&D cannot be underestimated; despite the fact that it entails immense expenses, these costs are well justified. The sustainability of many enterprises depends mostly on R&D: namely, pharmacological companies. It should be noted that R&D should not be perceived as the creation of something revolutionary new. It usually involves modifications or slight improvements. As a rule, Research and Development aims to maximize performance or enlarge functionality of the product or its serviceable life. We should say that this part of value chain is closely intertwined with marketing policies. Prior to the development of any application, the management needs to understand whether it will enjoy popularity among consumers.
Manufacturing process
The most important element of value chain is the process of manufacturing. During this stage the management must ensure that the product fully corresponds to the requirements set by the company, governmental institutions and certainly the requirements of the customer. They need to eliminate or at least minimize the possibility of defective products. For this purpose various methods can be employed:
- statistical quality control,
- quality circles,
- TRIZ (the theory of solving inventors problems) (Altschuller et al,1997).
The system of measurement can differ from each other; much depends on the specific industry and the nature of the product. If we are speaking about automobile industry, we may say that the testers pay special attention to such parameters as braking distance, initial velocity, acceleration of speed and so forth. Software developers have worked out their own system of quality control; it incorporates such techniques as bit testing, pressure testing, unit testing and so forth. It stands to reason that Testing procedures, implemented in different fields of business vary but all of them seek to identify or correct the most common defects in products. With the reference to TQM model, we need to say that this approach does not usually encourage constant inspections and audits because they do not encourage employees to work on the quality of the products on their own (Deming, 2000, p 28). Inspections are more appropriate for small samples or production and they need to be carried out only in exceptional circumstances.
Furthermore, by studying the most widespread errors the management can ascertain which part of the production process needs improvement. Therefore, we may say that these polices attain two goals: on the one hand, they satisfy customer needs and add value to goods and services, while on the other, they raise performance of the firm to a higher standard. Yet, it has to be admitted that there are some cases, when the companies are aware of possible flows yet, they do nothing to rectify it. We may remember the notorious case of Ford Pinto. The automobile, produced by Ford Corp did not comply with the safe standards and could easily explode in case of collision but the management of this company did not recall this vehicle because the cost of recall was too high (Birsch & Fielder, 1994). The decision was based purely on cost-benefit analysis, which is employed even now by quality managers. But this approach to quality can drastically decrease the perceived value of the product and the sales rates of the enterprise may drop.
Reliability of the product is a critical factor that increases its value and prolongs its sales life. Several brands like Rolex, Mercedes, Carl Zeiss established their reputations only due to their careful monitoring of the production process. To some extent, they can be regarded as paragons of excellence, and this is not an exaggeration. The thing is that the employees of these firms genuinely take pride in goods they produce and this is why they are always in the forefront of their industry. From the moment they came into existence, they realized that meticulous quality control is the key to sustainability.
The best strategies to add value to a product
These examples show that the perceive value of a product can be created in many ways: 1) careful choice of suppliers, innovative design, monitoring of the production process or post-delivery service. Each of these measures addresses mostly quantitative characteristics of the product. In theory companies should pay careful attention each of these quality management techniques. However, firms usually take a different stance to value chain. They first try to identify which qualitative characteristic plays the most important role in value creation: it may be the quality of raw materials, novelty, reliability, functionality etc. At this point we should illustrate the principles of their decision-making. In such an industry as winemaking the manufacturers attach importance mostly to procurement and production process. In this case, the major price determinants of price are the quality of wine, year of production and production. In fact, this is one of those occasions when the innovation is discouraged as this may negatively affect consumers behavior. In sharp contrast, in software development the main value-adding factor is design of the solution. In airline industry, none of the business processes can be overlooked. The examples show that that the management of the firm must be well-aware of consumers’ demands towards the product. They need to know why they choose this or that brand. Finally, it is vital to learn how they determine the value of goods.
The study of value chain can be of paramount importance to small enterprises, which have only begun their operations. They need to analyze the criteria according to which customers select a product. They also need understand how the perceived value of goods is created. The key objective is to decide which part of value chain must be prioritized. Value chain management can be the cornerstone of their success and continuous prosperity. Naturally, there are other circumstances that impact the performance of the company, for example, the cost of energy, labor force, threat of new entrants, bargaining power of customers or suppliers (Porter, 2009, p 4). But their influence can be neutralized if the firm succeeds in proving that its products are superior in terms functionality, reliability, novelty, user-friendliness or other qualitative characteristics.
The connection between quality control and organizational culture
In the previous sections we have described the importance of added value management and quality control. It can be observed that in the overwhelming majority of cases, the outcome may depend on the performance of the personnel. Continuous improvement of the business processes is hardly possible unless the workers are motivated enough. As a matter of fact, even the organizational culture must evolve. William Deming, the developer of TQM approach, argues that the companies which intend to add value to their products and remain competitive must make employees be proud of workmanship (2000. p 24). They must not view their job as a tedious routine. Furthermore, he maintains that the assessment of performance must be based on qualitative rather then numerical criteria. The problem is that such assessment of performance stifles creativity of the employees, who are mostly concerned with the number of items they need to produce within a certain period of time (Deming, 2000, p 30). The adoption of TQM requires transformation of managerial style; it should no longer be autocratic because such approach deprives workers of any desire to bring new initiatives. Some managers are eager to be the main decision-makers in the firm that they offer no room for creativity to their subordinates.
Apart from that it is vital that the management erases borders between various departments of the company. The employees must be able to share information with one another. This issue is extremely relevant for those enterprises which intend to put a new product on the market. Designers, engineers, sales representatives must work hand in hand so that it would be possible for them to better understand the nature of clients demands for the product and meet these demands (Deming, 2004). Unfortunately, many firms only declare the principles of TQM without practicing them. In this section we have attempted to illustrate an idea that quality and value chain management force the organizations to alter their structure and policies.
Conclusion
This discussion indicates that quality and value chain management are practically inseparable from one another. Businesses seek to maximize the value of their products by paying extra attention to the quality of various business processes: procurement, design, production, research and development, and post-delivery service. Some firms attach importance only to one or of these processes others seek to address each of them. As it has been mentioned earlier, this strategy aims to attain several goals: 1) to enhance satisfaction of the customers, and reduce operation expenses. We have demonstrated that price determination is value-based and that this tactic yields results to the firms, belonging to different fields. Such model as TQM, mapped out by William Deming is beneficial to that extent that it addresses each component of value chain and makes the product more appealing to the customer. Overall, we can argue that chain value and quality management is relevant practically for every company, irrespective of its size, structure, volume of production, and so forth. In the modern competitive economy the firms must never stop at what has been achieved as this may lead to their stagnation.
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