Research on the Relation between Quality and Competitive Advantage Based on Value Chain

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Research on the Relation between Quality and
Competitive Advantage Based on Value Chain
WANG Beijun
College of Economics and Management,
Southwest University, SWU
Chongqing, China
wangbeij@swu.edu.cn
PENG Jue
College of Economics and Management,
Southwest University, SWU
Chongqing, China
penjue@sina.com
978-1-4244-5326-9/10/$26.00 ©2010 IEEE
This study is supported by a grant (SWU0909630) from the Basic Scientific Research Special
Funding Project of Southwest University.
Abstract—Nowadays increasingly fierce market competition focuses on quality. Only through
the pursuit of high-quality products and services, is it possible to have a high international
competitiveness. From the viewpoint of strategic management accounting, based on the
theory of value chain, this paper explores the relation between quality and competitive
advantage and points out quality chain and value chain are integrated in the operation chain.
Through the analysis of upstream value chain, enterprise can optimize the procurement cost;
through the analysis of downstream value chain, enterprise can optimize the product life-
cycle cost and improve customers’ satisfaction.
Keywords-quality; competitive advantage; relation; value chain; strategic management
accounting

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I. INTRODUCTION
Harvard University Professor Michael E. Porter in his academic writing
Competitive Advantage said, “Value chain is a series of value-creating
activities through which an enterprise can produce valuable products or
services for the customers”(1) . Based on this Porter made an analysis of
how companies achieve lasting competitive advantage.
Any enterprise can be based on cost leadership strategy or differentiation
strategy to develop competitive advantage(2).
The ultimate competitive advantage comes from: at a lower cost,
providing customers with the same value; or at the same cost, providing
customers with more value. As an important weapon in modern market
competition, quality is greatly significant for enterprises to establish a
sustainable competitive advantage.
Below, this paper takes Professor Porter's theory of value chain as the
basic tool to analyze the impact of the quality on the value chain, explores
the relation between quality and competitive advantage, seek to establish
an effective way to competitive advantage.
II. QUALITY CHAIN AND VALUE CHAIN ARE INTEGRATED IN THE
OPERATION CHAIN
Production-operations of enterprises can be considered as the collection
of a series of operations set for finally meeting customer needs. The
operations form activity chain from the one to the other and from the
inside to the outside(3).
Operations take up and consume certain amount of resources, and output
of operations consists of two aspects, firstly from the perspective of value
in use, the output creates a certain quality and quantity of output;
secondly from the perspective of the value, the output is the output of the

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creation of a certain value. Transferring from one operation to the next,
thus goes step by step, until finally the product or service is available to
customers outside the enterprise. The final product is labeled as the
collection of a series of operations of an enterprise, which embodies the
value created by various operations, also embodies the quality created by
various operations.
Therefore, it is believed that activity chain not only is a value chain, but
also reflects the quality chain, the two parts are united in quality value
chain. With going on of operations, at the same time in the enterprise
quality and value are gradually accumulated and transferred, to form an
internal delivery system of quality and value. In the end the products are
transferred to customers. This enable the quality and value of enterprise
concentrated on the product into the quality and value perceived by
customer. It is concretely manifested that customers agree and are willing
to pay the price of the product, thus business income is formed. Therefore,
business activity chain is unity of quality chain and value chain.
III. ANALYSIS OF VALUE CHAIN BASED ON THE PRINCIPLES OF QUALITY
MANAGEMENT
Principles of quality management are putted forward in the ISO9000
standards of 2000 version, and it embodies the quality masters' incisive
viewpoint in the world, sums up the quality management theory and the
essence of the successful enterprises’ management practice. Under the
environment of global economic integration, operating philosophy of
companies should be at least closer to the common rules of successful
companies all over the world. Principles of quality management in the
ISO9000 standards are including: customer focus; leadership; total
involvement; process approach; system approach to management;
continual improvement; factual approach to decision making; mutually
beneficial supplier relationship .

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The eight principles are provided in the form of international standards,
fully for all companies which have universal significance. From principles of
the quality management we can know in order to gain a competitive
advantage through quality, not only value chain within the enterprise
should be analyzed, but also value chain needs to be extended outside the
firm, dating back to the upstream suppliers and extending to downstream
customers. Through business cooperation with them collaboration,
through the improvement of bilateral relations, enterprises can optimize
respective activity chain and achieve mutually beneficial results .
IV. ANALYSIS OF QUALITY - ENTERPRISE VALUE CHAIN
Every enterprise value chain is composed of a series of business unit value
chains which are linked together in a unique way. As I have already
pointed out, business activity chain is unity of quality chain and value
chain. Through a certain quality of inputs, the production activities within
an operation unit take place, and a certain quality of intermediate
products are outputted, which are taken as input of the next operation
unit. As operation unit goes, the quality is transferred in quality value
system composed of operation, and finally quality and value of the product
are formed. Thus, by analysis of internal value chain enterprise can
understand formation process of the product quality and value, as well as
contribution of each operation to quality formed and value added, and
take effective measures to minimize or eliminate non-value-added
operations and operations which can’t contribute to formation and
guarantee of quality .
The quality of operation forms finally the quality of the product. Therefore,
controlling operation processes helps optimize the quality chain, so that
the value chain is optimized. The process quality-control deserves to be
mentioned. It is widely used in modern production, primarily through
monitoring of the operation process, alarms if anomaly in the process
emerges, and detects and controls anomaly, so as to achieve improvement
and assurance of quality.

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V. ANALYSIS OF QUALITY - INDUSTRY VALUE CHAIN
Any industry, from the initial raw material exploiting to final consumption
of products, consists of a series of combination of operations with
different value, namely, industry value chain. The value chain of enterprise
is reflected in a series of activities of the value system. Figure 1 shows the
value system.
As value chain and quality chain are unified, when the value in the industry
value chain is transferred, the quality is also transferred at the same time.
Below, taking quality as vinculum, I try to grasp the relation between
enterprise and its upstream or downstream businesses.
A. Analysis of the Upstream Value Chain
Suppliers own the value chain of incoming product of enterprises, so the
product quality of supply side is an important factor to influence the
quality value chain of enterprises. Good teamwork relationship between
enterprises and suppliers can improve the value chain of both supply and
demand sides, and benefit both sides. For suppliers, it will be beneficial to
gain long-term stable customers, and through communication with
customers product quality is continuously improved; enterprises are able
to obtain high quality materials, components, and stable supply. Such a

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good relationship will enable enterprises to reduce costs and achieve cost
leadership strategy; or help enterprises to improve product quality and
achieve differentiation strategy.
For example, Toyota Motor Company builds a strategic alliance relation
with its parts suppliers (4), and actively participates in quality
enhancement program of the parts processing of suppliers, free of charge
for staff training for suppliers, and assists suppliers to establish Total
Quality Management system, which also make themselves obtain the
increase of the value from such a strategic alliance, reduce inventory cost
of parts and improve product quality.
The analysis of upstream value chain has great significance for the
enterprises to optimize procurement cost.
The traditional view is that enterprises when buying materials and
products, should choose a variety of suppliers in order to make room for
bargaining, and reduce procurement costs. This method which seeks to
reduce the procurement cost from pure economic viewpoint is not
unreasonable, but the problem is that if there are a large number of
suppliers, then it is extremely difficult to control quality. The resulting loss
is perhaps much greater than the cost reduced in the economic order.
Within the TQM system, in addition to price factor, the enterprises still
according to the quality and reliability of delivery of goods select a
relatively stable, single supplier, and maintain long-term good relations
with the supplier in order to obtain long-term high quality and low price
[5.]
A single source of supply can bring high quality, mainly due to:
1.Enterprises take supplier as the upstream of its value chain, and
incorporate suppliers into their strategic alliance actively participate in the

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quality improvement plan of supplier ,work together with suppliers to
improve supply quality.
2.The interests of enterprises and suppliers are closely related, therefore
suppliers have motivation to go in for produce and supply in little batch
sizes strictly according to the requirements, to improve the supply quality
with buyers.
Selecting relatively homogeneous and stable suppliers can also reduce
procurement costs, the reasons are:
1.Once a long-term stable cooperative relation of mutual trust is built,
enterprises can significantly save the inspection cost of inputs.
2.Enterprises can reduce the losses caused by inferior production as a
result of low quality inputs.
3.High quality inputs can reduce the consumption of raw materials, make
subsequent processes controlled easily, and reduce product costs.
4.Suppliers receive fixed client and a large number of long-term purchases,
so benefit from analysis of the value chain of the economies of scale,
thereby reduce the supply price.
Of course, because of a single supplier, enterprises run a risk of supply
disruption caused by strikes, mechanical failures and natural disasters etc.
However, in practice, despite obtaining most of the inputs from a single
supplier, generally enterprises retain 1-2 alternative suppliers who are
eligible to receive temporary orders and supply, in order to maintain
smooth supply channels.
B. Analysis of the Downstream Value Chain
Traditional management accounting regards terminal of cost management
as sale, neglects the development of customer relationships. But in fact

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concerning about the purchase cost of customers is helpful to bring
enterprises more market share and accurate product positioning. So the
value chain of enterprise should be extended to the downstream
customers. Development of relations between enterprise and customer
has an important strategic significance to enterprise.
By analyzing the value chain of customer, Enterprise can focus on
improving and strengthening relationships with customers, increase
customer value, to meet customer requirements. A good relationship with
customers not only benefits enterprises, but also makes customers get
cost effective.
For example, according to customer’s requirements, enterprises can
improve product design, reduce production costs. Improved design means
to reduce after-sales service costs and claims of potential quality issues.
The customer will reduce maintenance costs of equipment; extend
product life as a result of good design.
It seems to the customer that purchase price is certainly a factor in their
consideration, but not only a decisive factor. If the quality of product is
good, so that customers’ operating costs, maintenance costs, retirement
expenses are greatly reduced. Even the price of product is slightly higher,
customers also will receive the product. Therefore, when enterprises bring
customers’ value chain into their own vision, they should be concerned
about the user costs and product life-cycle costs, optimize design and
manufacturing costs and user costs.
The analysis of downstream value chain has great significance for the
enterprises to seek the lowest product lifecycle costs and establish a
competitive advantage.
Enterprises should not only emphasize advanced technology of product
design, but also think of the economical efficiency of manufacturing and
use. During analysis of the economical efficiency of product design
program, enterprises cannot focus only on the lowest manufacturing costs,

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but should consider the whole, with minimal consumption of social labor
to get the best social and economic benefits.
Specifically, it is to make the total product costs throughout the life cycle
minimized. In addition to design and manufacturing costs, the total costs
also include user costs.
Product life-cycle costs are all costs of settings and use of a system
(equipment, products, or other) [6], generally including: product purchase
price, operating costs, maintenance costs, losses on work stoppage caused
by failure of product, depreciation costs, as well as losses as result of
resale and updating. It can clearly be seen that product purchase cost only
occupies one part of the product life-cycle costs. if enterprises only lay
stress on the manufacturing cost or product purchase cost, while ignoring
user costs in product life-cycle costs, then it is not the most economic for
the customers. Such a practice impacts customers’ satisfaction
consequently makes enterprises lose a competitive advantage of products
in the market competition.
ACKNOWLEDGMENT
This study is supported by a grant (SWU0909630) from the Basic Scientific
Research Special Funding Project of Southwest University

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REFERENCES
[1] (U.S.) Michael.E.Porter, Chen Xiaoyue translation, Competitive
Advantage, Huaxia Press, 1987.
[2] David Faulkner, and Cliff Bowman,Competitive Strategy,Prentice
Hall,1997.
[3] Yu Xuying, Basic Theoretical Issues of Enterprise Strategic
Management and Strategic Management Accounting, Finance &
Accounting, 1999(8) , pp.21－29.
[4] Nie Jing, Analysis of Value Chain in Strategic Cost Management,
Finance & Accounting Monthly, 2002(7) , pp.15－18.
[5] A.V.Feigenbaum,Total Quality Control, McGraw-Hill Company,1983.
[6] Deng Ji, and Wu Detao, Economic Analysis of Quality, Shanghai
Popular Science Press, 1990

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