The notion of value chains probably has its origins
The demand chain as an
integral component of
the value chain
David Walters and
Mark Rainbird
The authors
David Walters is Professor and Mark Rainbird is Research
Fellow, both at the Sydney Graduate School of Management,
Sydney, Australia.
Keywords
Value chain, Supply and demand, Supply chain management
Abstract
The term “value chain” encompasses a variety of ideas and
concepts. This paper identifies two major themes: a “macro”
perspective of how markets operate and, at the other extreme, a
process-driven “micro” view of the individual firm itself.
Focusing on the latter in particular, it seems that corporate
emphasis is increasingly efficiency based with the prime
objective the reduction of costs. The recent difficulties
experienced by McDonald’s, Sainsbury and Marks & Spencer
may be due in part to a single-minded focus on supply-chain
management. Instead it is argued that a firm is best placed to
create value and exploit market opportunities when there is an
effective combination of supply-chain capabilities and demand-
chain effectiveness to maximise the organisation’s overall value
chain. These issues are explored using practical examples from
the retail and fast food industries. Questions whether traditional
views of marketing are broad enough or whether, just as the
logistics manager reinvented himself as the supply-chain
manager and the new corporate hero, the marketing
professional needs to reinvent himself as the demand-chain
manager.
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Journal of Consumer Marketing
Volume 21 · Number 7 · 2004 · pp. 465-475
q Emerald Group Publishing Limited · ISSN 0736-3761
DOI 10.1108/07363760410568680
465
with Michael Porter, almost 20 years ago (Porter,
1985). Simplistically, Porter proposed the value-
chain concept as a means of identifying each of the
business actions or stages that transformed inputs
into outputs.
Since that time quite a literature has developed
around value chains and related topics. Indeed the
underlying analogy is a powerful one – the overall
creation of value in a business environment being
similar to the inter-joined links in a chain – each
link interdependent on the other for the strength of
the chain as a whole, but each a distinct stage in its
own right. The strength of the chain is dependent
on the strength of each of the links. If one breaks
then the chain as a whole collapses. This makes
commonsense. If an oil refinery stops production,
the value chain linking an oil well to a car’s fuel
tank breaks down.
Conversely, improving the strength or
performance of one link may well improve the
performance of the whole chain. Simplistically
then, managers should be asking themselves:
.
What does my link do?
.
Where does it fit in the overall chain?
.
Can I improve the strength of my link and to
what effect?
.
How do I interact with other links and how
does the chain work as whole?
Traditionally, this might have lead to pursuing
vertical integration strategies – shortening the
chain and owning all the links – the twentieth-
century oil companies being classic examples
(Drucker, 2001).
The traditional view has been that at the end of
the chain is the customer and that the better the
chain is at servicing this customer the more value
will be created. At its simplest then,
understanding what each link does and how well
it fills its role in the chain provides a vehicle for
understanding each process or link, its strengths
and weaknesses and how the chain might best be
recast to maximise competitive positioning and
therefore value.
This view of the value chain, however, has its
limitations. To assume that the chain itself is a neat
set of synchronous links is too simplistic. The
business world is not that static and there is in fact
what Hagel and Singer (1999) refer to as a
constant “bundling and bundling” of processes
and links so that a static view of a simple, stable
chain needs to accommodate a more dynamic
model.
Indeed, it seems that the development of value-
chain thinking and value-chain management has
not realised its full potential. One of the principal
reasons is terminology. Some quite simple but
powerful ideas have become lost and confused in
 The demand chain as an integral component of the value chain
David Walters and Mark Rainbird
the absence of some agreed definitions of basic
concepts. Even a cursory review of the literature
shows the words “value chains” used in various
contexts to mean quite different things – from a
simple substitute for “supply chain”, to a
description of work processes to a strategic market
framework
Strategies and business models: a macro
and a micro view
Magretta (2002) illustrates very well the
distinction between a firms business model – what
the firm does and how it does it – and its strategies
– where it positions itself in the marketplace. Using
the example of Wal-Mart, she points out that the
underlying business model of that company is that
of a supermarket, which it has done very well,
pioneering many supply-chain efficiencies. On the
other hand, what distinguished Wal-Mart, at least
in its early years, was its strategy of putting its
stores in regional areas in the USA rather than in
the large towns and cities.
In this sense the notion of value chains operates
at two levels. The first is the strategic level, where
value-chain analysis is a means of charting where a
firm sits in the market and how it should position
itself. This is what might be termed the “macro
view”. This macro view is a means of analysing
what key industry drivers are and where the firm
sits. It is a perspective that is driven by the
overarching notions of creating “customer value”.
Traditionally, this has been driven by strategic
positioning in the marketplace, exploiting what has
been termed “profit pools” in various industries
(Gadiesh and Gilbert, 1998).
These “profit pools”, however, shift. The classic
example is the automotive industry where margins
are no longer driven solely by making the car, but
selling it, and more importantly financing that sale.
Additional “profit pools” have been added such as
car rentals and in some instances recovery
insurance.
These shifts are illustrative of what has been
termed the emergence of the “new economy”. In
some ways this is an unfortunate term, with
overtones of dot.com excess. In its broadest sense,
however, the new economy is about a series of
changes to the economic landscape, driven
partially by technology, but also by different
expectations of the market participants. One of the
consequences of this “new economy” is that value
is no longer necessarily created by simply owning
as many of the links in the value chain as possible –
the traditional strategy of vertical integration.
Instead what has been termed “virtual” integration
assumes a new importance. It is argued that it is no
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Volume 21 · Number 7 · 2004 · 465-475
longer an imperative to necessarily own the means
the production, but instead simply to have access
to them in an effective manner (Normann, 2001;
Hagel, 2002). Indeed the less resources the firm
has tied up, the less capital intensive it is, the more
likely it is to achieve adequate returns on those
assets. Firms then are increasingly specialising in
their competencies and forming alliances or
networks or clusters to fill in the other parts of the
value chain and amplify their own contribution. At
its simplest this is seen in successful using of
outsourcing of manufacture by Nike, Dell and
others.
The second “micro” level perspective of the
value chain is the aggregate of actual processes that
are occurring within the firm itself. This is
commonly labelled “operational management”,
but should not be limited to just thinking about
supply chains and logistics. Operations
management in the true sense encompasses all
those processes that a firm undertakes – from
managing its people, to building its products and
services, to selling those products. The outcome of
operational management should be the
achievement of the firm’s defined value objectives.
This is fundamentally a process-driven view of the
firm.
It is suggested that the real potential strength of
value-chain analysis lies not just in understanding
the micro and macro issues better, which it
hopefully does, but in understanding the
synthesis of the two. Strategic market
opportunities are useless in the absence of
operational processes to capitalise on them.
Conversely, excellent operations do not produce
value if they are not attuned to the market by
maximising customer value. The true creation of
value in its broadest sense comes from having
both halves of the equation working effectively
and in unison.
This paper, however, focuses on just one part of
that equation – the “micro” perspective, and seeks
to illustrate how the adoption of a process-driven
“chain” approach has raised questions about the
traditional role and function of marketing in the
firm.
The supply-chain manager as the new
corporate hero
The notion of the supply-chain manager as the
new corporate hero, championing reduced costs,
improving efficiencies and rewarding customers
with reduced prices, seems somewhat incongruous
to those brought up on the notion that marketing
was the dominant corporate philosophy. Indeed at
least one generation of business students and
 The demand chain as an integral component of the value chain
David Walters and Mark Rainbird
practitioners were taught that it was marketing that
was responsible for inculcating customer values
into the organisation and that this was the ultimate
means of fostering competitive advantage. Even a
cursory glance at today’s financial pages, however,
suggests that instead it is firms that consistently
and persistently manage their cost structures that
are seen as the over-achievers
A number of potential dangers arise from this
new supply-chain dominance of corporate
thinking. Not the least is that supply-chain
efficiency is mistaken for effectiveness, with undue
short-term emphasis on cost reduction at the
expense of contribution to broader gaols. In
particular, customer needs may ultimately be seen
in simplistic terms revolving simply around
reduced price as a major determinant of
satisfaction.
This may, at least partially, reflect a failure by
marketing as a discipline to provide the coherence
to corporate organisation, operations and
objectives that its proponents have claimed. In
response this paper proposes a broader
perspective, based on the notion of the demand
chain, which encompasses a more holistic view of
all of those processes in the firm that do, or should,
respond to the customer.
Supply chains: too much emphasis on
efficiency?
The notion that organisations have supply chains
that require active management to maximise
efficiency is well recognised. Indeed from being
an unfashionable backwater of management
theory and practice, supply-chain management
has asserted considerable influence on
operational and strategic thinking. Its influence in
retailing is a good example of how the supply-
chain manager has become the new dominant
force in driving corporate efficiencies and
profitability.
Waller (1998) discusses “customer-driven”
logistics as an increasingly accepted concept; “. . .
as businesses begin to understand that their future
existence depends upon the loyalty of the end users
of their products”. In particular, he noted that
“For retailers, it has been their focus on the supply
chain back into suppliers that has provided the
mechanism for value-chain visibility and control as
a formula for generating effective end-delivered
cost and consumer satisfaction”. He cites Marks &
Spencer in the UK as having “long been regarded
as leaders in this”.
Similarly, in Australia, two dominant retailing
groups, Woolworths and Coles have made “every
day low prices” their primary offer to customers,
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Volume 21 · Number 7 · 2004 · 465-475
an offer driven by and rooted in supply-chain
efficiency strategies. Woolworths “project refresh”
supply-chain-driven strategy has markedly
increased the return on sale ratio. Cumulative cost
savings has resulted in excess of A$1 billion over a
period of four years. This has seen the company
dominate its sector and produce consistent
increase in shareholder value, at least in terms of
share price. It is interesting that the company has
reinvested much of this surplus in lower selling
prices (Moullakis, 2003). This reflects the notion
that an effective supply chain will ensure adequate
customer satisfaction through reducing costs and
therefore prices.
It is suggested, however, that a downstream-
orientated supply-chain strategy focused on cost
reduction only, has a number of inherent
limitations. The first is that in oligopolistic or
semi-oligopolistic environments like the
Australian and UK supermarkets, the supply-
chain systems and relationships, are often far
from two-way, mutual agreements. The rationale
is based on increased volumes creating leverage
over suppliers resulting in increased procurement
margins, lower prices at the point of sale and
ultimately dominant market share driving greater
profitability for the retailer. Many of the smaller
specialist chains are being absorbed in the rush to
acquire outlets and the result is a merging of
market segments.
This has had a significant effect has been on the
supply-chain “partners”. Though poor
management responses have no doubt played a
part, the volume-driven strategy of the major
retailers has had a significant impact on both
small suppliers who are at risk of being
marginalised, and on the larger companies as
well. For example the largest Australian wine
producer, Southcorp, found that within 12
months supermarket sales had risen from 29 per
cent to 42 per cent of its business with a
significant decline in profitability
In Australia both the major retailing groups
(Woolworth and Coles) recently gave further
demonstrations of “retailer power” in alcohol and
petroleum retailing by acquiring independent
wine, spirits and beer operators and through
marketing arrangements with major oil
companies. In both product-markets there is
concern that the remaining independents will
have considerable difficulties in competing as
consumer pricing deals dominate these markets.
This lack of equity in supply-chain relationships
may ultimately invite government and legislative
responses and this has recently been flagged in the
Australian retail liquor market. Perhaps, more
importantly, it may be inadvertently introducing
an inherent fragility into the dominant partners
 The demand chain as an integral component of the value chain
David Walters and Mark Rainbird
supply chain that may not be even in its own long-
term interests. This is not only in terms of the
viability and stability of its suppliers, but may lead
to compromises in product quality and choice
that will reflect on its own brand and market
positioning.
The second and perhaps most important
limitation of a purely mechanistic supply-chain
approach entirely driven by cost efficiency is loss of
customer focus. Indeed, the notion that an
effective supply chain alone will ensure adequate
customer satisfaction through reducing costs and
therefore prices is not necessarily an adequate
model by itself. Sainsbury (the UK former
market leader in food retailing) noted in the late
1990s in an annual report the positive impact on
overall profitability of its increased logistics
productivity and saw this as a key corporate
strategy. This reflected a business model
dominated by a downstream oriented supply
chain, assuming a relatively “steady state” amongst
its customers. The problems that Marks &
Spencer, and to a degree Sainsbury, experienced
during the 1990s were not because they
mismanaged the operational effectiveness of the
business, but rather because they missed the shift
in customer expectations and did not appear to
respond to those expectations.
Towards an alternative model: the
emergence of the demand chain as a
concept
As a discipline supply-chain management first
appeared in the literature in the mid-1980s, but as
Cooper et al. (1997) suggest, it is based upon
fundamental assumptions emanating from
managing organisational operations, which in turn
can be traced back to channels and systems
integration research in the 1960s and more
recently work on information management and
inventory control. Supply-chain management was
defined by members of The International Centre
for Competitive Excellence (1994, cited in Cooper
et al., 1997) as:
Supply-chain management is the integration of
business processes from end-user through original
suppliers that provide products, services and
information and add value for customers.
Important from the point of view of this discussion
is the direction in which supply-chain planning
and coordination is seen to “travel”. Initially the
common view held was that it simply covered the
flow of goods from supplier through
manufacturing and distribution to the end user
(Keith and Webber, 1982, cited in Christopher,
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Volume 21 · Number 7 · 2004 · 465-475
1992). This was followed by a series of steps
seeking to somehow incorporate the customer into
the model.
Christopher (1998) for example adds an
interesting dimension to the supply-chain
perspective noting that:
It could be argued that it [supply-chain
management] should be termed “demand-chain
management” to reflect the fact that the chain
should be driven by the market, not by suppliers.
Equally the word “chain” should be replaced by
“network” since there will normally be multiple
suppliers and, indeed, suppliers to suppliers as well
as multiple customers and customers’ customers to
be included in the total system.
Langabeer and Rose (2001) take the argument a
step further by looking at the demand chain as an
entity in its own right making an interesting
differentiation between the supply chain and the
demand chain and between demand management
and demand-chain management. They define the
demand chain as:
The complex web of business processes and
activities that help firms understand, manage, and
ultimately create consumer demand.
They emphasise the point that demand-chain
management attempts to analyse and understand
overall demand for markets within the firm’s
current and potential product range. Supply
chains, by contrast emphasise the efficiencies in
the production and logistics processes, while the
demand chain emphasises effectiveness in the
business. A very useful point in their argument is
that demand-chain analysis and management
helps to improve an organisation’s processes by
aligning the organisation around a common plan,
improves coordination within the supply chain by
using forecasts and plans, and exploits the
commercial processes by understanding consumer
demand and by selecting those markets that best
meet an organisations, owned and/or “leased”,
skills and resources.
This introduces the notion that an effective
approach to demand-chain management first
requires the organisation to understand its current
and potential markets and second to identify the
essential (or core) processes and capabilities that
are required for success. They offer a useful
comparison of the two approaches:
(1) Supply chain:
.
efficiency focus (cost per item);
.
processes are focused on execution;
. cost is the key driver;
.
short term oriented, within the immediate
and controllable future;
.
typically the domain of tactical
manufacturing and logistics personnel;
.
focuses on immediate resource and
capacity constraints; and
 The demand chain as an integral component of the value chain
David Walters and Mark Rainbird
.
historical focus on manufacturing planning
and controls.
(2) Demand chain:
.
effectiveness focus; product-market fit;
.
processes are focused more on planning;
.
revenue is the key driver;
.
long-term oriented, within the next
planning cycles;
.
typically, the domain of marketing, sales
and strategic supply-chain managers;
.
focuses on long term capabilities, not short
term constraints; and
.
historical focus on marketing and supply-
chain alignment (Langabeer and Rose,
2001).
The authors go on to propose a demand strategy
comprising a supply-chain strategy (focusing on
manufacturing, distribution and network
optimisation), customer strategy (customers and
markets), a product and brand strategy (focusing
on key product requirements and customisation
needs), and a sales and marketing strategy
(creating awareness and demand). They suggest
that these, when coordinated, create a demand
strategy that may be expressed as:
The direction that a firm pursues to attract and
retain desirable customers and improve its product
positioning in profitable markets.
They expand the argument with a model
describing demand-chain management in some
detail as a:
Focus on creating demand strategy (what is
optimal for each product-market?) and manage the
entire organisation to meet this demand.
This model, however, remains essentially a
marketing-driven one that is emphasising customer
relationship management and ensuring that the
supply chain reflects this concern. In this sense it
retains a predominant place for demand strategy
that influences and by inference guides the supply-
chain activities. As will be argued below grafting the
supply chain onto a dominant demand perspective,
or in contrast seeking to somehow introduce the
customer into the supply chain, both fail to
accommodate what are two quite distinct and basic
components of the firms overall value chain.
Despite this, the identification of the demand
chain as a separate entity is a significant
contribution to the debate and to our
understanding of this area.
The demand chain as a distinct entity
How then should we view this broader notion of
the demand chain? Possibly a first step is to
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Volume 21 · Number 7 · 2004 · 465-475
reinforce that both supply-chain management
and demand-chain management are about
process management. Hammer (2001) argues
that as businesses become accustomed to the
customer economy ‘process thinking’ becomes
essential:
In order to achieve the performance levels that
customers now demand, businesses must organise
and manage themselves around the axis of process;
moreover, they must apply the discipline of process
even to the most creative and heretofore most
chaotic aspects of their operations.
Just as the industry level macro value chain is
dynamic, so too is its replicant within the firm.
Different processes do not necessarily work in
tandem and may often conflict. Production does
not always produce what sales wants to sell and
R&D does not always formulate what marketing
says the customer wants.
Interestingly, Butler et al. (1997) note what
they call “interaction costs”, namely “the money
and time that are expended whenever people and
companies exchange goods, services and ideas . . .
In a very real sense, interaction costs are the
friction in the economy”. This same notion can
be applied at the micro level of the firm. A firm’s
value chain is not a smooth synchronous link –
its has its own friction and its own interaction
costs.
Hagel and Singer’s (1999) description then of
“unbundling and rebundling” of organisational
structures as a means to adapt to new market
demands is a useful one. It is suggested that in fact
there is, or at least should be, a constant
realignment of core processes going on within any
firm on a day-to-day basis as it interacts with its
environment. Such constant realignments should
not be seen as a sign of instability or as a negative
force, but rather the ability to manage them pro-
actively optimises the ability to create value,
particularly the more dynamic the firms
environment.
The second step is to re-validate the notion of
the demand chain as a separate entity from the
supply chain. It is not an adjunct to the supply
chain, nor is it simply another re-statement of the
marketing concept. Marketing is a philosophy,
stressing the customer centric goals of an
organisation. The demand chain is a practical
description and analysis encompassing all those
processes within the firm that adopt and apply that
philosophy. In this sense the demand chain should
not be seen as the sole domain of the firms
marketing department. It should be thought of as
cross-disciplinary, encompassing all those
processes which contribute to orientating the firms
activities to the needs and requirements of the
customers. This potentially incorporates a range of
processes like production planning that would not
 The demand chain as an integral component of the value chain Journal of Consumer Marketing
David Walters and Mark Rainbird Volume 21 · Number 7 · 2004 · 465-475

be traditionally associated with direct customer emphasised that the characteristics identified are
interface intended as generic processes. A particular
The third step is a recognition that these process may well become more focused in some
notions of demand and supply while distinct also situations and in others may be replaced with
overlap and interact and should be seen as other features more relevant to that particular
constituent, but independent elements of what has firm’s business model. The list below shows the
been termed the firm’s value chain. It is also worth typical processes and activities comprising the
noting that having both competent and workable demand chain:
supply and demand chains are competitive (1) Identify the “macro-market” characteristics:
necessities. The best factory in the world is useless .
analyse business environment – identify
if it is producing the wrong product. The best product-market gaps;
innovation is worthless if it cannot be .
identify market segments and
implemented. Competitive advantage can, segmentation variables;
however, be spawned by excellence in either . ascertain market segment volumes; and
supply-chain processes or demand-chain activities, .
identify price points, product-service
or of course preferably both. feature offers and their suppliers by
In more simple terms a firm will create value segment.
when what the customer demands can be brought (2) Identify the “micro-market” characteristics. For
into synchronisation with what the firm can each segment:
supply, minimising friction and internal .
identify customer purchasing influences;
interaction costs and maximising the dynamic .
ascertain segment and adjacent segment
forces of the interaction. Where they are not market volumes; and
synchronised, value will either not be realised or .
identify the consumption-chain
actually destroyed. This may sound simple, but the characteristics.
reality of complex organisations is such that this (3) Create “value profiles”. For each segment:
process fusion is in fact problematic and represents .
identify the customer value model;
the key tactical task for management on a day-to- . customer expectations and customer
day basis. acquisition costs;
While both the demand chain and the supply .
quantify the “ideal” customer value model
chain are clearly specific to organisations and (the benefits, costs and value driver
situations, some broad features may be identified. imperatives); and
Figure 1 identified the basic components of the .
identify the required assets, capabilities
demand chain and the supply chain. It should be and processes.

Figure 1 Demand and supply chains as components of the value chain

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David Walters and Mark Rainbird Volume 21 · Number 7 · 2004 · 465-475

(4) Establish alternative value propositions. Review .

payment options;
the customer value models, identifying: .
financing;
.
customer expectations; . post-transactions services;
.
relative competitive positioning: product- .
maintenance;
service comparisons (range, quality, .
installation;
services, price, etc.); .
training;
.
relative costs; and .
operations;
.
the role that can be played by partner/ .
warranty operations;
complementor organizations (within or .
product/service liability commitments;
outwith the demand and/or supply chain). .
product-recall programmes; and
(5) Develop product-service options: .
customer loyalty programmes.
.
determine the unique/exclusive value
drivers that are important to target
customers; The following list the typical processes and
. forecast the potential revenues; activities comprising the supply chain:
.
cost the options; (1) Order receipt and entry:
.
establish cost structures and the asset
.
order acknowledgement;
“ownership” and funding implications;
.
credit checks;
.
identify the risk/return profiles;
.
inventory availability;
.
project the long-term economic free cash
.
manufacturing instructions; and
flows; and
.
price and discount extensions.
. estimate the potential for sustainable (2) Order processing:
competitive advantage of the product
.
order administration (generate invoice,
service options. generate picking documents, scheduling
(6) Evaluate the value delivery options. Identify the information);
optimal value-chain structure:
.
determine and report order status;
.
the role that can be played by partner/
.
create distribution documentation; and
complementor organisations;
. manage order location communications.
.
compare the “returns” to shareholders and (3) Evaluate the value delivery options:
stakeholders as well as to end-user
.
identify the optimal value-chain structure;
customers;
.
compare the “returns” to shareholders and
.
consider the implications of alternatives for stakeholders as well as to end-user customers;
asset, capability and process leverage; and
.
consider the implications of alternatives for
.
consider the implications of these on the asset, capability and process leverage; and
effectiveness and efficiency of the control
.
consider the implications of these on the
of the value delivery process. effectiveness and efficiency of the control
(7) Product and category management. A review of of the value delivery process.
the product range to determine current and (4) Order assembly:
future product and category profiles: .
liaison with manufacturing;
.
revenues, costs, contribution and cash .
order picking;
flow; .
packing; and
.
share of market, share of market value; .
unitisation.
. competitor analysis on like for like basis (5) Inventory management:
(markets, segments, customers); .
replenishment policies based upon
.
gap analysis; and demand forecasts and collaborative
.
investment requirements; risks, cash flow agreements;
forecast. .
cycle stock and safety stock response
(8) “Service” the value: customer relationship policies by customer segments and product
management. Service support levels and categories;
infrastructure comprising: .
key customer response policies; and
.
service intermediaries, roles, tasks and .
product liability/return procedures.
location; (6) Manufacturing:
.
technical support, installation, operation .
process selection;
and maintenance; .
capacity management;
.
presale liaison; .
materials requirement planning and
.
information and advice; management;
.
design services; .
quality control;
.
transactions systems; .
cost management; and
.
ordering systems; .
supplier/partner liaison.
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 The demand chain as an integral component of the value chain
David Walters and Mark Rainbird
(7) Order transportation. Order delivery
management that meets customers’ service
expectations. Selection of:
.
mode;
.
frequency; and
.
reliability.
(8) Customer services management. The
management of; time, dependability,
communications and convenience by
providing:
.
product availability;
.
agreed OCT;
.
flexibility; and
.
relevant and timely information.
This notion of the demand chain suggests that
marketing in its narrowest sense loses a lot of its
relevance and just as the old logistics manager has
reinvented himself as the new supply-chain
corporate hero, so perhaps the marketing manager
needs to take a broader perspective of the firm as a
whole and reinvent himself as the demand-chain
manager.
An example: McDonald’s Corporation
Leaving to one side whatever views one may have
on the merits of its products, the growth of
McDonald’s Corporation over the last four
decades from a hamburger stand to a major
international corporation has been impressive.
However, McDonald’s in 2003 reported a
quarterly loss amidst wide-scale discontent
amongst franchisees and a plunging share price at
ten year lows. What went wrong?
In many respects McDonald’s was one of the
pioneers of both efficient and effective supply-
chain management and of marrying these with
traditional marketing techniques, fostering a whole
new category of food retailing. McDonald’s
delivered new levels of product consistency
through standardised menus and strict supplier
controls. It maximised the impact of its delivery
points by developing and applying demographic
research to its store placement. It maximised
throughput and asset and inventory utilisation by
focusing on speed of production and delivery
through new standards of staff training and process
control. It deployed economies of scale and
bargaining power to deliver affordable products.
By fostering the concept of franchising
McDonald’s in effect not only outsourced the
actual production and delivery of its products, but
also outsourced operational risk by putting the
onus to raise and manage working capital on the
franchisee. These were not the innovations of a
company in the new millennium, but of the 1970s
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Volume 21 · Number 7 · 2004 · 465-475
and 1980s. In this sense McDonald’s was a
business orchestrator (Hagel, 2002), long before
that term was coined.
Despite the historical excellence of its supply
chain, it would be misleading to see McDonald’s as
a purely supply-driven operation. Again from an
historical perspective, the company has excelled in
implementing classical marketing techniques,
particularly the “5P’s”. McDonald’s introduced
new standards of training and emphasis on its
“people” exemplified by the now ubiquitous “fries
with that, sir?”. “Price” has been a consistent
theme, with the affordability of convenience food
increasing markedly over the last few decades.
“Place” has been reflected both at the level of
individual store placement and at a broader level in
a still expanding campaign to open more stores in
more locations in more countries. Indeed, the
company seems to measure its own performance
by this as much as anything else. “Promotion” has
seen the golden arches, Ronald McDonald and a
myriad successful advertising and point-of-sale
campaigns successfully targeting various market
segments, including, in particular, children where
again it was a pioneer, albeit it has been criticised
for doing so. Finally, McDonald’s traditional
“product” set, including the ubiquitous Big Mac,
set new standards for consistency and reliability.
Perhaps most importantly this was not just the “5
P’s” geared up into a marketing programme, but
an effective demand chain that formed an integral
part of the firms overall business model or value
chain.
Overall this was a stunningly successful model
where the process fusion between the demands of
the emerging fast food market were skilfully
combined with new value-chain capabilities to the
extent it is arguable whether McDonald’s created
fast food or the other way around.
In the face, however, of falling profits and
investor wariness, these were strategies and themes
that seemed to be failing the company. In early
2003 a company presentation was described as
follows:
The top team’s wooden presentation on April 7th
(2003), liberally doused with marketing cliches and
soundbites about the importance of “people,
product, place, price, promotion” and “improving
focus” only reinforced the impression . . . [that
management] lacks the vision or stomach to make
the necessary changes (The Economist, 2003).
The reality appears to be that the nature of the
market, or the “macro” value chain McDonald’s is
operating in is changing, at least in its more mature
geographic segments. For example in Australia a
BIS Shrapnel (2003) study suggests the average
Australian is eating out less often, 83 times in 2002
compared with 94 occasions in the year 2000.
Furthermore, the reasons have changed: “Whereas
 The demand chain as an integral component of the value chain
David Walters and Mark Rainbird
‘convenience’ was the main determinant three
years ago, the principal reasons now are ‘special
occasion’, ‘break in routine’ and ‘meeting friends’.
The report also identifies changing tastes;
consumption of hamburgers is down,
consumption of takeaway Thai, Sushi, and Indian
foods are increasing, awareness of “healthy eating”
clearly growing.
McDonald’s appeared to be aware of this.
Comments by Peter Bush (a senior executive) and
reported by Shoebridge (2003) suggest that the
company was at least partially aware of its
problems:
Our rivals are not just other fast food chains; they
are any other informal eating-out occasion. For
example, about 6,500 new coffee shops have
opened over the past four years, all competing for a
share of the money people spend on eating away
from home.
The real opportunity for McDonald’s is to
develop compelling reasons for people to visit us
more often . . . That means having more relevant
menu variety, and offering menu solutions rather
than promotional products. There are lots of
promotional products on the menu at the
moment, but they need to be underpinned by
changes to the core offering. [McDonald’s is
seeking to become] more relevant to
contemporary consumer values.
In this changing environment, Bush also indicated
the rigidity of the McDonald’s operating and
supply-chain systems is not longer a competitive
advantage but a limiting factor in its response. It is
admitted that the new menu activity “placed
strains on McDonald’s purchasing department,
operating systems and restaurant staff”.
McDonald’s appeared to be a good example of the
limitations of simply pursuing supply-chain
efficiency and what might be termed classical
marketing exploitation techniques in a rapidly
changing environment. In effect, McDonald’s was
responding to new pressures with a traditional
response – lower the price and use cost efficiencies
to wear out the competition. This was exemplified
by the “dollar deal” campaign apparently targeted
at Burger King.
This led some commentators in financial
markets to question the on-going viability of the
company’s business model, calling on it to
“manage for cash” rather than growth, liquidate
some of its vast real estate holdings and return that
cash by way of higher dividends. In effect they were
casting doubt on the efficacy of McDonald’s value
chain and the business model supporting it as the
fundamental alignment between what
McDonald’s produces (its supply chain) and what
the customer wants (its demand chain) seemed to
have faltered.
Clearly disturbed by both the poor results and
the press response McDonald’s reacted. The then
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Volume 21 · Number 7 · 2004 · 465-475
CEO, Jim Cantalupo issued “McDonald’s
revitalization plan” (McDonald’s web site
October 29, 2003). Since then there has been a
steady rise in the company’s profitability and
share price, though the later may simply reflect
what McDonald’s calls “Manage for financial
strength” and which seems a direct reaction to
calls for changes in capital management by
“reducing capital spending compared with 2002
and using the money remaining after capital
expenditures to pay down debt and return cash to
shareholders”.
The revitalisation plan was still clearly
designed around the traditional marketing
mix of the “5Ps”; people, products, place, price
and promotion, or what Cantalupo announcing
the first quarters results in 2004 called “the
winning combination of improved service,
better tasting and more relevant food, affordable
menu options and extended hours of service”.
This has even been followed up with a “a
comprehensive balanced lifestyles platform
to help address obesity in America and
improve the nation’s overall physical
well-being”.
If this revitalisation plan were nothing more
than a marketing re-launch one would have to
question its sustainability in the face of the sort of
changes to the “macro” value chain in which
McDonald’s operates as noted above. There is,
however, some evidence of a more fundamental
re-examination of McDonald’s whole demand
chain. For example in launching the revitalisation
plan it was noted that:
On a broader level we are in the early stages of
taking a global, cross functional approach to
menu management. We are creating menu
management centres around the world that will
use a consistent consumer-driven process to
develop world-class products that leverage our
size and scale.
And, to add emphasis, the company’s new strategic
course is:
. . . reflecting a fundamental change in our approach
to growing the business. Previously we emphasized
adding new restaurants. Today, our emphasis is on
building sales at existing restaurants.
This too suggests an awareness of the benefits of
first understanding the demand chain and then
designing the supply chain. Indeed it is a clear
move away from the pursuit of economies of
scale towards the economies of scope and
integration.
It is too early to tell whether there is a true
re-evaluation and realignment of McDonald’s
demand chain and therefore its value chain as a
whole, but it provides an illuminating example of
the issues.
 The demand chain as an integral component of the value chain
David Walters and Mark Rainbird
Figure 2 Designing and managing the value chain
Concluding comment
The demand chain then is:
An understanding of current and future customer
expectations, market characteristics, and of the
available response alternatives to meet these
through the deployment of operational processes.
In this paper we have suggested and identified
examples of an emerging qualification for
competitive advantage – pro-actively managing
both the demand- and supply-chain processes to
minimise friction and internal transaction costs
thereby enhancing overall value. Where, however,
does this fit with the firm’s overall strategy?
As noted above, Magretta (2002) makes a
valuable distinction between a firm’s business
model and its strategy, citing the example of Wal-
Mart who initially adopted a fairly standard
supermarket business model, but prospered by
adopting a strategy of building its supermarkets
outside metropolitan areas in rural locations. The
two notions of business model and strategy are,
however, clearly linked. As Magretta acknowledges
Wal-Mart only made their strategy work by
improving on the base business model “through
innovative practices in areas such as purchasing,
logistics and information management”.
It is suggested that constant refinement of
business models is as important to the success of
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Volume 21 · Number 7 · 2004 · 465-475
the firm as its strategy and that both are critical to
the integrity of the firms overall value chain. This
implies a far more important role for operations
management than may have been traditionally
recognised, and that in this new context the
marketing professional needs to very much
consider himself an “operational manager”. We
suggest that an important topic for research
concerns the implementation of the value-chain
model and its implications for operations
management in the emerging new business
models. In Figure 2 we suggest a starting point.
The demand-chain and supply-chain processes
have been identified and fused into a value-chain-
process model. There are a number of issues that
need to be researched. These vary from quite
simple issues concerning structure and
communication through to the more complex
issues relating to intra and inter-relationship
management structures and performance planning
and control.
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