How Important Productivity is to the Value Chain

The fast-food restaurant drive-thru I go to every Sunday morning hasn’t been serving the liquid creamers that accompany the coffee I order with my meals.     

At first, they said the creamers were out of stock.  A week later, they said they can only serve one (1) creamer instead of the two (2) that should come with every coffee order.  Finally, they substituted the coffee creamer with a non-dairy powder cream in a sachet. 

The fast-food company saved money in all three (3) instances.  They saved when they served coffee without any creamer or with just one instead of the usual two.   They also saved when they started serving the powdered creamer in sachets as the liquid creamer is more expensive.   

The fast-food company can claim savings but did it deliver value? 

In his seminal book, Competitive Advantage,[1] Michael Porter introduced the value chain, a representation of a firm’s “collection of activities that are performed to design, produce, market, deliver, and support [the firm’s] product.”

Value is the “amount buyers are willing to pay for what a firm provides them.”  The typical strategy of the firm is to create value that “exceeds the cost of doing so.”  According to Porter, value is the key to competitive positioning.

The fast-food company normally served two (2) 10-ml cups of imported liquid creamer with every coffee order.  It was something I look forwarded to and expected whenever I went to the fast-food company’s drive-thru.  When the fast-food drive-thru stopped serving the creamer, I was not happy.  I felt I was no longer getting my money’s worth from my coffee order.

Bundling two (2) 10-ml creamers and two (2) packets of sugar was standard for every coffee order, according to the drive-thru attendant.  Unfortunately, the fast-food drive-thru no longer had the stock and substituted the creamer with a cheaper sachet of locally produced non-dairy powder. 

The fast-food company apparently thought substituting the imported creamer with a cheaper local product would be no big deal.  The management of the fast-food company probably didn’t believe its customers would buy less of its coffee, even with the downgrade. 

The cost of all the activities in the value chain must be less than the price of the product.  The difference between the price and the cost is the margin.    Enterprise executives tend to cut costs or differentiate their products to maximise margins. 

The problem arises when customers like me perceive a lower worth of the product as a result of the enterprise’s cost-cutting.  Perceived lower worth leads customers turning away from the enterprise and opting for alternatives from the competition, resulting in lower demand for the enterprise’s product.    

Many enterprises see-saw between cutting costs and differentiating their products as they struggle to maintain their products’ profit margins.  When they see costs going up, some enterprises buy cheaper materials and services.    When they see demand slowing, they spend more for product development and advertisement of their product’s features.  In either case, the enterprise ends up losing customers or spending more than it should.    

All functions in an enterprise make up its value chain.  Whether it be purchasing, marketing, logistics, sales, manufacturing, finance, accounting, human resources, information technology (IT) services, legal, public relations, research & development, etcetera–every department and individual play a part in delivering value for the enterprise.  Every one in an enterprise contributes.  There is no exemption.  If the value chain is to be competitive, everyone has to work and to work together toward the common cause of maximising the margins of the enterprise’s products. 

Every part of the value chain must be productive.  Productivity drives value. 

Productivity is output over input.  In the value chain, productivity is the output as delivered and accepted by customers versus how much was inputted in doing so. 

That means whatever function we work in, we must deliver output that would benefit the enterprise’s product margins.  Our performance, no matter how seemingly small or irrelevant, contributes to the value chain. 

Some of us equate value chains with supply chains.  This is wrong thinking and it is detrimental to an enterprise’s productivity.  Whereas the supply chain’s basic functions like purchasing, manufacturing, and logistics directly add value to a product, roles such as legal, human resources, marketing, sales, engineering, information technology, and research & development (R&D) are just as equally important. 

Human resources professionals hire talented people to staff the enterprise’s organisation.  In-house legal counsels ensure products are compliant to local laws and regulations and defend the enterprise’s products’ intellectual properties.  Finance executives ensure the capital needs for products.  Marketing cultivates ideas for R&D to develop into reality.   

A condiment such as a coffee creamer may seem trivial.  For value chains, nothing is trivial.  Every detail and process have a bearing on how a product’s value chain will bring worth to customers. 

The fast-food company may dismiss my disappointment if it turns out I’m alone in complaining about a downgraded coffee creamer.  If a vast majority of its customers continue to consume the fast-food company’s coffee, then well and good, the enterprise would have saved money without any dent to its coffee’s perceived value. 

But if my sentiments are shared with many coffee drinkers who decide to turn away and find alternatives, then the enterprise would no doubt be strongly encouraged to improve the productivity of its value chain.  Perhaps it will study how better to source its imported creamer to ensure it will always be bundled with the coffee it sells. 

In the meantime, I decided to get my Sunday morning coffee from the fast-food company’s competitor. 

About Overtimers Anonymous


[1] Michael E. Porter, Competitive Advantage,  (New York, N.Y. : The Free Press, 1985), pp. 36-38

The Four (4) Priorities of Business

San Miguel Corporation (SMC) is the largest business enterprise in the Philippines and is among the top 2,000 global firms listed by Forbes magazine.  SMC’s gross revenue was PhP 384 billion ($USD 7.6 billion approximately) in 2018 earned from its diversified portfolio that includes food & beverage products, real estate properties, and infrastructure & energy investments.

Steering the SMC behemoth is the corporation’s president and chief executive officer, Mr. Ramon Ang, who has been actively overseeing not only the growth of the corporation but also its investments in infrastructure and contributions to rural communities.  Mr. Ang has received accolades for the continuing profitability of SMC but he stands out for his pursuit of high-capital projects such as construction of a new international airport and the building of an elevated expressway passing over the heart of Manila. 

Mr. Ang apparently recognises the challenging responsibilities of running the largest enterprise in the country.  He demonstrates that profit cannot be the sole priority. He recognises the value of SMC’s standing in society while at the same time makes sure the corporation maintains its competitive edge over rivals and continues to grow in the industries it does business in. 

Every business enterprise has four (4) priorities.  These are:

  1. accumulate wealth;
  2. attain & sustain competitive advantage;
  3. establish esteem;
  4. grow in influence.

Accumulate Wealth

The aim of an enterprise is not only to make a profit but to reap cash from that profit and ensure that the amount it earns exceeds the minimum rates of return of investments.  Furthermore, the wealth that’s gained should translate into cumulatively higher net worth in the form of increased cash liquidity and added equity or stakeholders’ value as invested into the enterprise. 

The priority of the enterprise, to put it another way, is to make money and increase it. 

Attain and Sustain Competitive Advantage

A successful enterprise gains competitive advantage and maintains it.  An enterprise would wither if it cannot compete versus its counterparts in the marketplace. 

Michael Porter defines competitive advantage as one’s position and degree of advantage possessed by an organisation over its competition.[1]

According to Porter, an enterprise gains competitive advantage via either of the following strategies:

  • Cost Leadership
  • Differentiation
  • Focus

Enterprises that position their products or service as the lowest cost in the market are applying the Cost Leadership strategy. 

An enterprise adopts a strategy of Differentiation when it positions its products or services as superior in quality or utility versus others in the market.

Firms that target a certain group or niche of society are using a strategy of Focus.  When firms use a Focus strategy, they either offer products at the lowest cost for that particular group or niche or they advertise superiority but to a specific audience.  In other words, firms apply either the generic Cost Leadership strategy or a Differentiation strategy but for only a specific target market.

An enterprise can only adopt one strategy though large conglomerates may apply an exclusive strategy for each of its business divisions.

Porter’s Generic Competitive Strategies1

Esteem & Reputation

Enterprises have learned that public perception has bearing on how their products and services will perform in the marketplace. 

How a firm presents itself in public has become a management requisite.  When it comes to esteem and reputation, managers are bound to address the following:

  • Corporate Citizenship
  • Community Relations
  • Communications
  • Environmental Stewardship
  • Global Citizenship

Corporate Citizenship refers to a firm’s compliance to laws and regulations.  These include paying the right taxes, cooperating with regulators and government agencies, providing transparent information on finances and operations, and following the spirit and letter of the law in all manners of conduct. 

Community Relations is the enterprise’s outreach to its neighbours and to charitable institutions.  Enterprises receive and provide feedback from and to community leaders and with private associations especially those directly affected by the enterprise’s operations (e.g.  factories and distribution centres).  Enterprises also proactively donate time and resources for those less fortunate.  The purpose of all of these is to establish cordial and synergistic ties with communities the enterprises co-exist with. 

Communications take the form of public bulletins via media as in printed (newspapers), broadcast (television & radio), and social (internet networks). Communications may either be external or internal.  Either the audience is the outside world (the external) or for the benefit of employees and their families (the internal).  The purpose of communications would be to present an enterprise’s positive agenda whether it be clarifying a stand on controversial issues, or the quick dissemination of information on product issues (e.g. details on product recalls, clarifications versus rumours). 

Environmental Management has has to do with the enterprise’s initiatives in regard to environmental protection.  It is more than just compliance to existing laws.  Enterprises are expected to show effort in appeasing the ever growing movement to protect the planet Earth and its resources.  These include the participation in programs such as waste recycling, energy conservation, anti-pollution projects, and in public activities such as tree-planting, placing of artificial coral reefs, and hearings on environmental impact studies. 

Global Citizenship goes one step further especially for enterprises that are involved with suppliers and/or customers in different countries and territories.  Whether the involvement is foreign-based operations, partnerships or joint ventures, or sourcing of materials and labour, enterprises are expected to exercise compliance with domestic and international laws and treaties.  They are also expected to respect cultural and economic differences and proactively reach out to local communities they co-exist with.  It is complicated and comprehensive work but it helps the enterprise attain a reputation of admiration on a global level.       

Influence & Growth

Despite the pressures to deliver results in the short-term, enterprises have to plan for long-term sustainability and growth.  They also realize growth isn’t just about numbers in the balance sheet; it is about expanding their sphere of influence in the markets they compete in.

Enterprises need to have strong influence not only with their customers but also with their stakeholders, their suppliers, their employees, and with the communities they work with.  Having influence assures lasting stability and sustenance.  Successful enterprises therefore always plan for the long-term even as they may have to deal with the demands in the short-term.

Typical approaches for long-term influence and growth are business leadership, and vertical and horizontal integration.  Business leadership includes dominating markets with superior products and services. Vertical integration means gaining influence over suppliers on the upstream and customers or distribution channels on the downstream.  Horizontal integration means widening influence with firms with similar industries or expanding one’s business to new markets.  This often means mergers and acquisitions of other enterprises to gain greater market share and capital.

The four (4) priorities apply to all enterprises.  A start-up business may perhaps work more on wealth while a global manufacturing firm may busy itself boosting its reputation.  The level of importance an enterprise gives may not be evenly spread among the four (4) priorities.  Despite whatever emphasis given to each of its priorities, the enterprise should not lose focus altogether on all, lest it risks the potential downsides.      

The four (4) priorities and the level of focus an enterprise places on each sets the foundation for an overall direction that inspires the subsequent strategies in operations, organisation, marketing, and finance. 

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[1] Michael E. Porter, Competitive Strategy,  (New York, N.Y. : The Free Press, 1980), p. 35

Improving the Customer Experience and Gaining Higher Productivity

This Photo by Unknown Author is licensed under CC BY-SA

An automotive service centre in Manila, Philippines advertises that it opens at 8:00am. The doors actually open, however, around 8:15am.  Employees time in before and after 8am but pass through the washroom before heading to their desks.  A waiting client who would have arrived at 8:00am would probably be served earliest at 8:30am. 

The automotive service centre is part of a dealership that sells Japanese cars, vans, and motorcycles.  The dealer represents the final point of a Japanese automotive company’s global supply chain.  The Japanese company is heralded as a market leader but that view is far from the mind of the customer waiting for a half hour for one of its dealers to open the doors of its service centre. 

The Japanese owners of the automotive company wouldn’t likely be aware of the experiences of their Manila dealer’s customers. 

They probably wouldn’t know how customers felt for having to wait for 30 minutes.  And they probably wouldn’t know some customers would have to wait even longer because the supervisor who would decide on specific service requests hasn’t arrived yet. 

Many executives don’t know first-hand what their customers are experiencing with their enterprise’s front-liners.  They would rely on feedback, surveys, and statistics but they would hardly see the actual experiences of customers. 

Improving the customer experience can catapult an enterprise’s competitive advantage.  But it’s not only because customers will flock for the better service but also because when one improves the structure and processes that improve that experience, it uplifts not only customer satisfaction but the enterprise’s productivity. 

The automotive service centre has a competitor down the street.  The competitor advertises that its service centre opens at 8:00am but at 7:30am, the service representatives are already checking in customers and inspecting cars.  At 8:00am sharp, the service representatives are already interviewing the customers for their specific complaints and requests.  Service representatives provide the first group of waiting customers diagnoses and estimates within a few minutes.  The service centre would immediately begin work on cars as soon as the customers sign on their approvals.  Customers who were at the service centre at 7:30am for routine service checks would be checking out as early as 9:30am. 

The automotive competitor serves more cars than the one who keeps customers waiting.  It’s not because the competitor has more poor-quality automobiles that need fixing, but it’s because the competitor sells more cars than its neighbour.  The competitor does not keep its customers waiting and makes sure all the cars that come in the morning are served as soon as possible. 

Customers at either service centre may not be very loyal to the automotive brand they buy but they will remember their experiences.  This would have an impact on what automobile they will decide to buy in the future.

But more than that, the competitor has a higher productivity than the neighbour who opens late.  The higher productivity assures no backlogs in service jobs that would not only drive up expenses but also make it difficult to keep the customer experience consistent.

The competitor didn’t just add staff to engage waiting customers right away.  The competitor also invested in multiple maintenance bays to service more cars simultaneously.  The competitor also laid out the facility to have two types of bays: one for quick routine service and the other for longer, more complicated jobs. 

The routine service bays were closest to the facility’s doors so service attendants can move cars quickly to customers who can leave immediately.  The other bays were located deeper which made them closer to parts storage and special equipment. 

The competitor has seen the challenge for consistent customer experience and productivity grow.  Sales has gone up and down in recent months.  But because the competitor has made sure he has enough staff and bays, customers haven’t been complaining. 

The automotive service centre that kept customers waiting for 30 minutes, however, had obviously not paid attention to how promptly its staff reports in the morning.  And one could see there was no system of assigned bays or facility plan when it comes to maintaining customers’ cars. 

Companies are fickle when it comes to customer experiences.  Every so often they harp on it, but when times get tough, they sometimes forget about it. 

When one connects a consistently good customer experience with higher productivity, one can see the immediate benefits.  The intangible advantages of satisfied customers result in the tangible paybacks of having a productive work-place. 

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Competitive & Non-Competitive Priorities and How to Deal with Them

In several firms I’ve worked with, I couldn’t help but notice that supply chain managers would sometimes be engrossed with priorities regarding compliance to government-mandated occupational safety & health standards.  They would have long meetings and spend much time on the nitty-gritties of reports to be filed and procedures to follow.

But in the following week, the same managers would switch to issues regarding costs that were going over budget.  The general manager of their company was concerned about expenses and wanted a meeting so the supply chain managers would be rushing to prepare their presentations to explain their respective functions’ spending. 

Priorities would shift week after week, month after month.  One day it would be safety, the next day it would be quality.  When managers would ask which priority is more important, their boss would reply: “all of them.” 

There are two (2) types of priorities enterprise executives deal with.  These are competitive priorities[i] and non-competitive priorities. 

Competitive priorities are those when addressed add value to the enterprise.  Examples are sales, cost, quality, delivery reliability, and after-sales service excellence.  As the term suggests, these priorities directly contribute to an enterprise’s competitive advantage. 

Non-competitive priorities are those that executives do not recognise as adding value to the organisation but are too important to ignore.  Examples are safety, security, industrial labour relations, community relations, government regulation compliance, environmental safeguards, and employee health.  These priorities may not contribute to an enterprise’s competitive advantage but are imperative to its ongoing operations. 

Enterprise executives see competitive priorities as vital to the organisation’s growth.  Consumer goods executives, for example, would develop marketing and product initiatives to bring about higher sales. 

Enterprise executives, on the other hand, see non-competitive priorities as crucial to the organisation’s survival.  Executives, for example, would stress industrial safety as a program to prevent injuries.  They would expect their organisations to adopt safety practices so that people don’t get hurt, and not lead to disruption in operations. 

To put it in another way:

  • Competitive priorities address opportunities.
  • Non-competitive priorities address adversities.

Classifying priorities in either category may help enterprise executives not only what to tackle first but also determine who should be leading the respective priorities. 

Quality and safety are everyone’s jobs but if there are no quality control or safety managers to lead priorities in either one, then it would probably be chaotic for the executives trying to handle them on top of the other important things they have to do. 

It also pays to have awareness of the two types of priorities to know how they would affect the enterprise.  Classifying community relations as a non-competitive priority, for instance, may prove worthwhile for an enterprise who has a factory situated within a largely populated city.  It would encourage executives to invest in a manager who would engage with the factory’s neighbours and handle issues that might result in mutual benefits. 

Being mindful of competitive and non-competitive priorities also gives the organisation a constant big picture of the work it’s doing.  Engineers building a new storage facility, for example, would best have an understanding of what they want to accomplish.  It wouldn’t just be about building for more capacity; it would also be about the impact on working capital, better distribution of products, reduction in damages, and safer working conditions.

Executives can sharpen their enterprise strategies with their awareness of both competitive and non-competitive priorities.  The trick is to have balance and brevity.  Some company mission statements tend to stress too much on quality and leave out the rest.  Other corporate philosophies overdo it with numerous paragraphs that overwhelm the organisation. 

We all have priorities.  We just need to understand which ones are competitive and non-competitive in which the former addresses opportunities while the other takes on adversities.  Both are too important to ignore so it would help if we classify the things we do as either competitive or non-competitive. 

If we can’t do things all at once, we may need to check our structure and resources.  We also should try to make sure our overall strategies aren’t complicated or overwhelming for our own organisations. 


[i] Davis, Mark M., Aquilano, Nicholas J., and Chase, Richard B., Fundamentals of Operations Management, 1999, Chapter 2, p. 25

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