Enterprise Modelling and Process Orientation
In addition to developments in software architecture, business administration
also contributed to the rise of business process management. There were two
major factors that fuelled workflow management and business process management.
Value chains as a means to functionally break down the activities a
company performs and to analyze their contribution to the commercial success
of the company, and process orientation as the way to organize the activities
of enterprises.
Value Chains
Value chains are a well-known approach in business administration to organize
the work that a company conducts to achieve its business goals. Value chains were developed by Michael Porter to organize high-level business functions and
to relate them to each other, providing an understanding of how a company
operates.
Porter states that “the configuration of each activity embodies the way
that activity is performed, including the types of human and physical assets
employed and the associated organizational arrangements” and he continues
to look at the enterprise and its ecology by stating that “gaining and sustaining
competitive advantage depends on understanding not only a firm’s value chain
but how the firm fits in the overall value system.”
In order to fulfil their business goals, companies cooperate with each other,
i.e., the value chains of these companies are related to each other. The ecology
of the value chains of cooperating enterprises is called value system. Each value
system consists of a number of value chains, each of which is associated with
one enterprise.
The value chain of a company has a rich internal structure, which is represented
by a set of coarse-grained business functions. These high-level business
functions, for instance, order management and human resources, can be broken
down into smaller functional units, spanning a hierarchical structure of
business functions of different granularity.
The process of breaking down a coarse-grained function into finer-grained
functions is called functional decomposition. Functional decomposition is an
important concept to capture and manage complexity. For instance, order
management can be broken down into business functions to obtain and store
an order and to check an order.
Figure 2.9 depicts a typical value system of an enterprise E, shown at the
centre of the value system. This enterprise manufactures goods. In order to
do so, it cooperates with suppliers S1 and S2 that provide raw material. To
bring the products to its customers, enterprise E cooperates with transport
and logistics companies that realize a channel from the manufacturer E to the
buyers.
The graphical arrangements of value chains in the context of a value system
are centred at the enterprise under consideration, enterprise E in the example.
If channel enterprise C1 was addressed, then C1 would have been drawn
in the centre, and it would have E among its incoming value chains and a
set of buyers among its outgoing value chains. Value systems provide a very
high-level characterization of the relationship of a particular enterprise to its
business environment.
The arrangement of the value chains in a value system does not imply any
particular ordering of the functions that the respective companies conduct.
Therefore, value chains do not have a formal meaning as far as the ordering
of the business functions is concerned. The arrangement of the value chains in
Figure 2.9 is quite obvious in a manufacturing environment, where enterprise
E receives raw material from its suppliers (incoming value chains) and delivers
products via its channels to its buyers (outgoing value chains).
In order to realize collaboration between suppliers, the manufacturer, channel
companies, and buyers, many activities have to be performed in a coordinated
fashion. The manufacturing enterprise E needs to negotiate a contract
with each supplier, and the flow of incoming raw material must be planned
and controlled properly. As a result, there are multiple interactions between
the enterprise and its business partners.
Although the ordering of the value chains indicates that the flow of information
and goods is from left to right, i.e., from supplier to enterprise E, in
this case the start of interaction is in the opposite direction, i.e., from E to the
supplier. The ordering of the value chains in a value system loosely follow the
overall impression the modeller wants to communicate with the value system.
The concrete interactions that realize the business collaboration are complex
interactions.
In the sample value system shown, the overall flow of goods and information
is from left to right. There are, however, also interactions in the opposite
direction. For instance, the ordering of raw material by the enterprise E from
Supplier 1 is realized by an interaction between these companies that originates
from E. This interaction is performed if the need for raw material is
determined.
This situation is depicted in Figure 2.10, in which the logical ordering of
the value chains in a subset of the value system shown above in Figure 2.9
is enriched by arrows between the value chains, representing interactions between
Enterprise E and Suppliers 1 and 2.
The value chain of a company subsumes all activities that the enterprise
conducts to fulfil its business goals. The organization of the business functions
within a value chain is shown in Figure 2.11. (Porter uses the term activity
for these highest-level business functions. To provide a consistent terminology
and to be in line with business process terminology, the term business function
is used in this book.) The value chain is based on a functional organization
of an enterprise, where the activities that are conducted are organized into
business functions.
From a business administration point of view, the business functions that
a company performs can be partitioned into primary functions and support functions. Primary functions contribute directly to the competitive advantage
of the company, while secondary functions provide the environment in which
the primary functions can be performed efficiently. The secondary business
functions include human resources, technology development, procurement,
and the infrastructure, all of which are required for supporting the primary
business functions.
All functions that a company performs need to contribute to the success of
the company, and the margin is the difference between the resources invested
and the revenue generated by the company. The primary business functions
of a value chain are as follows.
• Inbound Logistics: Business functions that collectively make sure the company
receives raw material, goods and information, required for performing
its business. For instance, in order to realize inbound logistics, a set
of suppliers needs to be identified, contracts need to be negotiated, and
operational procedures need to be in place. Inbound logistics interact significantly
with business partners to request quotations, to collect and select offers, to negotiate contracts, to organize transportation, and to manage
incoming goods and information.
• Operations: Operations aggregate business functions responsible for producing
added-value products that contribute directly to the revenue of the
company. In a manufacturing company, the products are produced by the
operations business function.
• Outbound Logistics: Once products are manufactured, outbound logistics
take care of distributing these products to warehouses or other distributing
centres so that they can be distributed to the customers.
• Marketing and Sales: In marketing and sales, the business functions for
marketing the company’s products and for selling them in a competitive
market are organized. The typical function in this primary business function
is organizing and conducting a campaign to market a new product.
• Services: Once a product is sold, the company needs to keep in touch
with buyers, both to cater to problems with the sold product and to provide
valuable customer information for developing and marketing future
products.
While Porter explains very well the functional decomposition of business functions,
he does not identify the role of processes, although processes fit very
well into the value chain approach. Below, the relationships of business functions
that a firm performs in the context of a value system are identified and
captured in business processes.
Due to the complexity inherent in large-scale organizations, the granularity
of business processes needs to be in line with the particular goals associated
with the business function that a particular business process supports. By
doing so, a complete picture of the work conducted by a company and the
processes that contribute to it can be developed.
While the approach by Porter is tailored towards traditional enterprises,
for instance, manufacturing, there is a rich set of extensions of Porter’s work.
Due to the technical scope of this book, these extensions and the business
implications of value chains and value systems are not discussed in detail.
However, value systems provide an appropriate holistic setting for the business
administration background of business process management.
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