In today’s modern business environment, the competitive landscape and requirements to successfully compete are evolving and shifting constantly. The primary reason for this is that the rapid escalation in disruptive technology has led to increased customer demands. It’s been happening since the rise of the internet. Another factor driving change is the steady performance of the global economy over the past decade and the resulting increases to standards of living. The combination of these two factors has drastically changed the way consumers value and evaluate the goods and services at their disposal.
These changes and disruptions are impacting small businesses and large enterprises alike. With consumer preferences shifting towards features and convenience, businesses are forced to attack product development from a value perspective as opposed to taking the historically popular cost-centric approach. On the B2B front, customers are placing more emphasis on supplier competencies such as visibility, integration, and risk management. In recent years this has brought increased attention to the concept of value change management. While the definition of a value chain will vary slightly depending on the source, it is in essence a set of integrated activities performed to deliver a valuable product or service to a given market. The overall goal of value chain management is to deliver the most value for the least cost in order to create a competitive advantage.
The idea of a value chain was pioneered by American academic and Harvard professor Michael Porter in his 1985 book Competitive Advantage: Creating and Sustaining Superior Performance. In this book, Porter introduces the five activities that contribute to establishing a company’s value chain. Maximizing the value in any one of these five areas will provide a company with an immense competitive advantage in its industry.
- Inbound Logistics: Receiving, warehousing, and inventory control.
- Operations: Value-creating activities that transform inputs into products, such as assembly and manufacturing.
- Outbound Logistics: Activities required to get a finished product to a customer. These include warehousing, inventory management, order fulfillment, and shipping.
- Marketing and Sales: Activities associated with getting a buyer to purchase a product.
- Service: Activities that maintain and enhance a product's value, such as customer support and warranty service.
In some professional circles, the terms “supply chain” and “value chain” are often times lazily used interchangeably. While the activities associated with supply chain are of central importance to the value chain, the value chain covers a broader scope of activities. Supply chain refers to all of the steps and processes that go into producing and delivering goods or services such as sourcing, procurement, manufacturing, and logistics. Value chain on the other hand, includes all of the business operations which add utility or value for a business’s customers. Below I will discuss a few examples to make this picture clearer.
Samsung is a manufacturer of high end electronic products such as TV’s, tablets, and cell phones.
o Supply chain- all of the components that go into producing Samsung’s products are part of the company’s supply chain.
o Value chain- the extended warranties Samsung offers on its products are part of the company’s value chain.
Best Buy is a consumer electronics retailer.
o Supply chain- all of the products Best Buy sells are part of its supply chain.
o Value chain- Best Buy has a very strong value chain. Some components include: free delivery into your home, installation and repair services performed by Best Buy’s Geek Squad.
Now that I have provided more definition around what a value chain is, hopefully it is clear why now more than ever it is important for companies to focus on developing their value chain in order to obtain and retain customers. In my next post I am going to dive deeper into value chain competencies specific to supply chain management and procurement such as risk management and supplier integration, and discuss how these competencies are being valued by business customers.