Value chainis the sequence of business functions in which customer usefulness is added to products. Exhibit 1-2 shows six primary business functions: research and development, design, production, marketing, distribution, and customer service. We illustrate these business functions using Sony Corporation’s television division.

1.Research and development (R&D)—Generating and experimenting with ideas related to new products, services, or processes. At Sony, this function includes research on alternative television signal transmission (analog, digital, and high-definition) and on the clarity of different shapes and thicknesses of television screens.

2.Design of products and processes—Detailed planning, engineering, and testing of products and processes. Design at Sony includes determining the number of component parts in a television set and the effect of alternative product designs on quality and manufacturing costs. Some representations of the value chain collectively refer to the first two steps as technology development.

3.Production—Procuring, transporting and storing (also called inbound logistics), coordinating, and assembling (also called operations) resources to produce a product or deliver a service. Production of a Sony television set includes the procurement and assembly of the electronic parts, the cabinet, and the packaging used for shipping.

4.Marketing (including sales)—Promoting and selling products or services to customers or prospective customers. Sony markets its televisions at trade shows, via advertisements in newspapers and magazines, on the Internet, and through its sales force.

5.Distribution—Processing orders and shipping products or services to customers (also called outbound logistics). Distribution for Sony includes shipping to retail outlets, catalog vendors, direct sales via the Internet, and other channels through which customers purchase televisions.

6.Customer service—Providing after-sales service to customers. Sony provides customer service on its televisions in the form of customer-help telephone lines, support on the Internet, and warranty repair work.

In addition to the six primary business functions, Exhibit 1-2 shows an administrative function, which includes functions such as accounting and finance, human resource management, and information technology, that support the six primary business functions.

When discussing the value chain in subsequent chapters of the book, we include the administrative support function within the primary functions. For example, included in the marketing function is the function of analyzing, reporting, and accounting for resources spent in different marketing channels, while the production function includes the human resource management function of training front-line workers.

Each of these business functions is essential to companies satisfying their customers and keeping them satisfied (and loyal) over time. Companies use the term customer relationship management (CRM)to describe a strategy that integrates people and technology in all business functions to deepen relationships with customers, partners, and distributors. CRM initiatives use technology to coordinate all customer-facing activities (such as marketing, sales calls, distribution, and post sales support) and the design and production activities necessary to get products to customers.

At different times and in different industries, one or more of these functions is more critical than others. For example, a company developing an innovative new product or operating in the pharmaceutical industry, where innovation is the key to profitability, will emphasize R&D and design of products and processes. A company in the consumer goods industry will focus on marketing, distribution, and customer service to build its brand.

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