Value-Creation Activities of the Enterprise

The field of international business is large and growing. The multinational enterprise (MNE) is the leading actor on the stage of international business. Multinational enterprises today account for the greater part of international transactions. To be classified as an MNE a company must operate in six or more foreign nations.

The fundamental purpose of any business is to make a profit. A company makes a profit if the price it can charge for its output is greater than its costs of producing that output. To do this, a company must produce a product that is valued by consumers. Thus we say that businesses engage in the activity of value creation.

The price consumers are prepared to pay for a product indicates the value of the product to consumers.

Companies can increase their profits in two ways:

1) by adding value to a product so consumers are willing to pay more for it. A company adds value to a product when it improves the product's quality, provides a service for consumers, or customizes the product to consumer needs in such a way that consumers will pay more for it; that is, when the company differentiates the product from that offered by competitors.

2) by lowering the costs of value creation (i.e., the costs of production). Companies lower the costs of value creation when they find ways to perform value creation more efficiently.

Thus there are two basic strategies for improving a company's profitability - a differentiation strategy and a low-cost strategy.

It is useful to think of the company as a value chain composed of a series of distinct value-creation activities including production, marketing, materials management, R&D, human resources, information systems, and the company infrastructure. We can categorize these value-creation activities as primary activities and support activities.

Primary activities of a company involve creating the product, marketing and delivering the product to the buyers, and providing support and after-sale service to the buyers of the product. Here we consider activities involved in the physical creation of the product as production and those involved in marketing, delivery,' and after-sale service as marketing. Efficient production can reduce the costs of creating value (e.g.. by realizing scale economies) and can add value by increasing product quality (e.g., by reducing the number of defective products). Efficient marketing also can help the company to reduce its costs of creating value (e.g., by generating the volume sales necessary to realize scale economies) and can add value by helping the company customize its product to consumer needs and differentiate its product from competitors' products.

Support activities provide the inputs for the primary activities. The materials management function controls the transmission of physical materials through the value chain - from procurement through production and into distribution. An effective materials management function can monitor the quality of inputs into the production process. This results in improved quality of the company's outputs, which adds value.

The R&D function develops new product and process technologies. Technological developments can reduce production costs and can result in the creation of more useful and more attractive products. Thus R&D can affect primary production and marketing activities and, through them, value creation.

An effective human resource function ensures that the company has an optimal mix of people to perform its primary production and marketing activities, that the staffing requirements of the support activities are met and that employees are well trained for their tasks and compensated accordingly.

The information systems function makes certain that management has the information it needs to maximize the efficiency of its value chain and to exploit information-based competitive advantages in the market place.

Company infrastructure - consisting of such factors as organizational structure, general management, planning, finance, and legal and government affairs -embraces all other activities of the company and establishes the context for them. An efficient infrastructure thus helps both to create value and reduce the costs of creating value.