Productivity and Value Chain Management

Human resources are main drivers for enhancing productivity and value in an organization. Knowledge-based organizations such as consultancy firms, IT companies and pharmaceutical companies typically invest more on human capital, that may help enhance labour productivity or total factor productivity, which in turn boost economic parameters like economic value added, profitability and net worth. This paper, among others, includes a case study on trends in growth of both labour and total factor productivity in a multi-business unit firm by fitting a statistical growth curve and then making more realistic productivity comparisons among business units. In globalization era while foreign based multinationals may be in a position to spend more through internal R&D route, others such as new firms in developing countries may find more convenient to pursue their R&D goals through ‘contract research’ route. Similarly, as manufacturing is very expensive in most European countries including US, it makes greater economic sense to outsource their manufacturing to countries like India where ‘contract manufacturing’ could be a cheaper alternative. Value chain partnerships are thus emerging as a practical strategy for outsourcing activities that were previously done internally within the company. While ‘contract manufacturing’ and ‘IT outsourcing’ is typically from western world to developing nations, ‘contract research’ flow is generally from developing to developed nations where research base is much stronger.

Value chain partnership is a strong and close alliance in which one company or business unit forms a long-term arrangement with a key supplier or distributor for mutual advantage. As long as costs of external services are lower than internal rates outsourcing is always beneficial but when volume of activity outsourced exceeds a limit that may be called cut-off limit, it may be beneficial to carryout that activity in-house. This paper presents a case study for determining a decision rule for outsourcing which offers a rational basis that can be employed in variety of situations where outsourcing economics depends on volume of activities. The case study assumes operating costs of the activity to be outsourced as a sum of fixed and variable costs. The paper also makes detailed review of several other factors such as acquisitions and alliances, diversification, knowledge and innovation, entrepreneurial initiatives, and empowerment that act as drivers for productivity and value creation. Finally, the paper emphasizes that in an organization both value chain management and business process management are vital for value creation.