Value Chain and its competitive edge
A value chain is a high-level model developed by Michael
Porter used to describe the process by which businesses receive raw materials,
and value to the raw materials through various processes to create a finished
product, and then sell that end product to customers. It is also a set of
activities that an organizations carries out to create value for its customers.
Companies conduct value-chain analysis by looking at every production step
required to create a product and identifying ways to increase the efficiency of
the chain. The overall goal is to deliver maximum value for the least possible
total cost and create a competitive advantage. Using this viewpoint, Porter
described a chain of activities common to all businesses, and he divided them
into activities, primary and support activities, as shown below:
Primary Activities
Primary activities relate directly to the physical creation,
sale, maintenance and support of a product or service. These could include
Operations, Sales, Marketing, etc.
Supportive Activities
These activities support the primary functions above. These
include human resource management, technological advancement, etc.
Please refer to the below diagram for a quick understanding
of Porters Value Chain Analysis:
 |
| Value Chain Model |
As mentioned earlier, the aim of the value chain is to
create a competitive edge. In a world where competitive advantage is required
to stay in the market for the long run, the companies are focusing on identifying
the activities and how they can create value to the customers. This is an
on-going process and does not have and end point. Some of the strategies adopted
by companies are:
- Cost leadership
- Innovation
- Differentiation
- Growth
- Alliance
IT or Information Technology in today’s generation is one of
the main gateways of creating competitive advantage. With the growth of
technology and the internet, it has opened up many channels of attaining the above-mentioned
strategies to attain a competitive edge. Let’s look into each of the strategies
and examples of how IT has assisted the businesses to attain these strategies:
Cost Leadership
Cost Leadership is a term used when a company projects itself
as the cheapest manufacturer or provider of a particular product or commodity
in a competition. This can be attained through cutting of operational costs
which will reduce the total cost of the product.
IT systems like ERP help a company to reduce their internal
cost which will reduce the final cost of the product leading to cost leadership.
Enterprise Resource Planning (ERP) systems integrate all business processes into
one enterprise-wide solution. This is accomplished by having a centralized
database that all business functional areas have access to. This reduces the
internal cost and reduces the delay.
Another example is Wal-Mart Stores Inc. Walmart has been
successful using its strategy of everyday low prices to attract customers. The idea
of everyday low process is to offer products at a cheaper rate than competitors
on a consistent basis, rather than relying on sales. Wal-Mart is able to achieve
this due to its large scale and efficient supply chain management through a SCM
Software. They source products from cheap domestic suppliers and from low wage
foreign markets. This allows the company to sell their products at low prices
and to profit off thin margins at a high volume.
Another example would be the presence of ERP. The ERP
software integrates all the internal activities of the firm, enabling them to
have proper co-ordination and co-operation leading to reduced variable cost in
the firm which helps to reduce the cost of the product.
Innovation
Innovation is the process of creating latest ideas and
processes which help a business. With the short life cycle of innovation, it is
necessary to keep re-innovating as the previous innovation, over a period of
time, becomes a necessity. There are many IT innovations which have been a success
and have assisted companies to conduct their business in a quicker, cheaper
way.
The first example is the existence of the internet. The
internet and the users are a large community where there is ease of access of
information. Along with information, multiple parties are connected and
communication and data sharing is quick and simple.
Examples: With the invention of E-mails, IM. Collaborative
application etc. the communication process has been simplified. E-mails and IM’s
are instant communication methods and allows the managers to communicate without
delay and make quick decisions. Collaborative systems allow people from
different locations to work together over the internet and intranet.
Differentiation
A differentiation strategy calls for the development of a
product or service that offers unique attributes that are valued by the
customers.
Example: Virgin Airlines uses two differentiation methods to
tap the market. The methods are Pricing and Customer service. By reducing the costs
associated with air travel, Virgin Airlines is able to remain competitive with
the cost-cutting airline companies. The other method is customer retention
through extensive CRM practices. They ensure they are constantly connected to
the customers and provide customer satisfaction which differentiates them from the
other airlines.
Another example would be of the company Apple. With the help
of IT, they create differentiated products every six months. They do not focus
on the price but on the quality and look.
Alliance
Establishing new business linkages and alliances with
customers, suppliers, competitions, consultants, and other companies. These linkages
may include mergers, acquisitions, joint ventures, formation of virtual
companies, or other marketing, manufacturing, or distribution agreements between
a business and its trading partners.
Example: An example is Amazon. Amazon is a virtual business
which allows the customers to purchase goods without the hassle of stepping
out. Amazon has a large network of suppliers and Amazon uses a seller support
website which connects all the suppliers through the internet and this allows
the sellers to know how each product is doing and know their reorder level.
This is with the help of Inventory Management System.
Another example would be how SCM and CRM helps a company
create alliances with suppliers and the customers.
Growth
Growth could be expansion vertically or horizontal. It could
be creating new products or entering new markets. The more a company grows, the
higher the range of business is. Growth Strategy can create competitive
advantage by being present in multiple location which would lead to them being easily
accessible to the customer.
Example: With the use of the internet, many companies are
either converting to a virtual company or implementing the bricks and clicks strategy.
With this, they have a physical store along with an online store. The users
have the choice to either purchase the product in the store physically or order
online. With the help of the internet, the company can be easily accessible.
Hence, we can state that IT has assisted many companies grow.
An example is Bhatbhateni in Nepal. They have both a locational
store along with the online store.
CRM and SCM assists in growth as it connects the firm with
the external alliances. This allows them to find the best vendors or sellers.
Marketing Systems also help the company grow by allowing
them to get visibility.
We can now conclude with the statement that IT has assisted
multiple companies create value which in the long run leads to creating a
competitive edge. This allows the company to compete in the market for a longer
period of time.