The Value Chain

1. The Components of the Value Chain

Within operations management, the concept of the value chain plays a central role. Like the supply chain, the value chain encompasses the interconnected series of activities that transform raw materials and resources into a finished product or service, ultimately delivered to the customer. However, the focus in the value chain is on adding value—improving the product or service, improving the processes that develop them. This chain includes all stages, from initial conception and design through procurement, production, marketing, distribution, and after-sales support. Each stage adds value by transforming the product or service in a way that fulfills a customer need or preference. By analyzing the value chain, operations managers can identify opportunities to streamline processes, optimize resource allocation, and ultimately enhance customer satisfaction while ensuring cost-effectiveness.

There are five primary components of the value chain and four supporting components. The primary components are:

• Inbound logistics—getting needed materials and other inputs into the firm from suppliers
• Operations—turning inputs into products or services
• Outbound logistics—delivering products or services to consumers, distribution centers, retailers, or other partners
• Marketing and sales—customer engagement, pricing, promotion, and transaction
• Support—service, maintenance, and customer support

The secondary components are:

• Firm infrastructure—functions that support the whole firm, including general management, planning, IS, and finance
• Human resource management—recruiting, hiring, training, and development
• Technology; research and development—new product and process design
• Procurement—sourcing and purchasing functions

hint

Inbound logistics, a primary function, is actually receiving materials and goods and transporting them to where they will be used. Procurement, a secondary function, is finding the supplier with the best products or prices, arranging payment, and signing contracts.

While the value chain is typically depicted as it’s displayed in the figure below, goods and information don’t necessarily flow in a line from one function to another. For example, an order taken by the marketing function can trigger an inbound logistics function to get components from a supplier, operations functions (to build a product if it’s not available), or outbound logistics functions (to ship a product when it’s available). Similarly, information from service support can be fed back to advise research and development (R&D) in the design of future products.

term to know

Value Chain

The process of adding value to products, whether goods or services, at every stage of development from conception through marketing, distribution, and support.

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2. Imitation Resistance

There is no exhaustive list of key resources that firms can look to in order to build a sustainable business, and recognizing a resource doesn’t mean a firm will be able to acquire it or exploit it indefinitely. But being aware of major sources of competitive advantage can help managers recognize an organization’s opportunities and vulnerabilities and can help them brainstorm winning strategies. And these assets rarely exist in isolation. Oftentimes, a firm with an effective strategic position can create an arsenal of assets that reinforce one another, creating advantages that are particularly difficult for rivals to successfully challenge.

While many of the resources below are considered in isolation, the strength of any advantage can be better leveraged if organizations are able to integrate their approach in a way that maximizes their advantage and makes it harder for competitors to compete. Firms that craft an imitation-resistant value chain have developed a way of doing business that others will struggle to replicate. Competitive advantages that are hard to imitate include, but are not limited to:

• Brand
• Scale
• Invested Customers
• Differentiation
• Network Effects
• Distribution Channels
• Intellectual Property

These are considered in depth in the next tutorial.

IN CONTEXT

FreshDirect was the first online-only grocery store in America. That is, they deliver fresh groceries to your door and have no physical stores. When we compare FreshDirect’s value chain to traditional rivals, there are differences across every element. But most importantly, the elements in FreshDirect’s value chain work together to create and reinforce competitive advantages. Incumbents trying to copy the firm would be straddled across two business models (a conventional grocery store and online delivery services like Shipt and DoorDash), unable to reap the full advantages of either. FreshDirect’s lead time allows the firm to develop brand, scale, data, and other advantages that competitors lack. Over 20 years later, they are still the only establishment of their kind. Grocery stores have scaled up ordering and delivering, and there are now several delivery services that will buy and deliver groceries from stores, but FreshDirect has a unique position as a wholesaler that exclusively delivers. This model means there is lower overhead and better prices than any competitor can offer.

When a firm has an imitation-resistant value chain, they have a critical competitive asset. From a strategic perspective, managers can use the value chain framework to consider a firm’s differences and distinctiveness compared to rivals. If a firm’s value chain can’t be copied by competitors without engaging in painful trade-offs, or if the firm’s value chain helps to create and strengthen other strategic assets over time, it can be a key source for competitive advantage. Many online services, such as FreshDirect, Amazon, Zara, Netflix, and eBay, illustrate this point. They have a combination of brand recognition, large-scale operations, and invested customers that were built over decades and now dominate the industry.

An analysis of a firm’s value chain can also reveal operational weaknesses, and technology is often of great benefit to improving the speed and quality of execution. Firms can often buy software to improve things. Common tools are:

• Supply Chain Management (SCM): This links inbound and outbound logistics with operations. SCM systems can link to suppliers, manufacturers, and customers, in order to provide value to customers. For example, Procter and Gamble (P&G) and Walmart SCM systems are integrated, which means P&G knows when inventory is low at Walmart stores and automatically ships those items directly to the store so that Walmart never runs out of P&G merchandise. This frees up warehouse space for Walmart, reduces Walmart’s need for capital to finance the inventory, shores up sales for P&G, and makes customers happy, because their favorite product is never out of stock (Haveliwala, 2021).
• Customer Relationship Management (CRM): This supports sales (online and conventional), marketing, and in some cases, R&D. Amazon, for example, combined with other systems, creates value for customers by analyzing massive amounts of data in their CRM system, as it constantly gathers information through customer’s searches, their wish lists, and carts. This allows Amazon to personalize recommendations and make decisions on individual marketing campaigns based on this data. Such data collection has met with resistance from some customers, which we will take up later in this unit, but it is effective as a sales technique.
• Enterprise Resource Planning (ERP) Software: This is software implemented in modules to manage the entire value chain. ERP can integrate many processes, including financial management, risk management, warehouse management, and human resource management, so all functions work together for maximum efficiency. Starbucks, like many companies, uses an ERP system to combine all systems into a single, unified system. All of the data from individual systems in different departments and stores provide extensive information about all areas of the business, and operations managers use that information to make critical decisions.
• Artificial Intelligence (AI): AI is used to assist in value chain management by optimizing shipping and delivery, forecasting demand, and many other tasks. For example, UPS uses AI software called DeliveryDefense, which helps them tackle the problem of package theft, and the technology predicts the likelihood of a successful delivery (UPS, 2023).

Such tools can impact more efficiently integrating the activities within the firm and with its suppliers and customers. But remember, these software tools can be purchased by competitors, too. While valuable, such software may not yield lasting competitive advantage if it can be easily matched by competitors as well. There is a potential danger here. If a firm adopts software that changes a unique process into a generic one, it may have lost a key source of competitive advantage, particularly if other firms can buy the same software. For example, a CRM tool that sends emails recommending products to customers based on past purchases may look exactly like all the other emails they receive engineered by the same tool.

This isn’t a problem with something like accounting software. Accounting processes are standardized, and accounting isn’t a source of competitive advantage, so most firms buy rather than build their own accounting software. But using packaged, third-party SCM, CRM, and ERP software typically requires adopting a very specific way of doing things, using software and methods that can be purchased and adopted by others.

EXAMPLE

During its period of PC-industry dominance, Dell stopped deployment of the logistics and manufacturing modules of a packaged ERP implementation when it realized that the software would require the firm to make changes to its unique and highly successful operating model, and that many of the firm’s unique supply chain advantages would change to the point where the firm was doing the same thing and using the same software as its competitors. By contrast, Apple had no problem adopting third-party ERP software because the firm competes on product uniqueness rather than operational differences.

While the value chain is an important concept, the important thing to remember is the fact that companies can leverage technology in order to better understand and manage the value chain, which creates more value for customers, whether that be never being out of stock of inventory through more targeted marketing, or integration of systems that allow seamless distribution of products. For the company, the advantages are easier management and tracking, with the ability to report on the value chain elements, which means they sell more products.

terms to know

Imitation Resistance

Qualities of a product that are hard or impossible for competitors to replicate due to brand, customer loyalty, size, and other advantages.

Supply Chain Management (SCM)

Software that links inbound and outbound logistics with operations.

Customer Relationship Management (CRM)

Software that supports sales (online and conventional), marketing, and in some cases, R&D.

Enterprise Resource Planning (ERP) Software

Integrated software modules to manage the entire value chain. ERP can integrate many processes, including financial management, risk management, warehouse management, and human resource management, so all functions work together for maximum efficiency.

Artificial Intelligence (AI)

Sophisticated computer software that simulates human interactions, creativity, or problem solving. AI is not stand-alone software but may be incorporated into other software tools like CRM systems.

REFERENCES

Haveliwala, M. (2021, June 6) Vendor managed inventory – A walmart and P&G case study [blog]. Linkedin. www.linkedin.com/pulse/vendor-managed-inventory-walmart-pg-case-study-mohammed-haveliwala/

UPS (2023, December 21) UPS’s DeliveryDefense pits AI against criminals. UPS.com. about.ups.com/us/en/our-stories/innovation-driven/ups-s-deliverydefense-pits-ai-against-criminals.html