The Business Value Chain Model

Although the Porter model is very helpful for identifying competitive forces and suggesting generic strategies, it is not very specific about what exactly to do, and it does not provide a methodology to follow for achieving competi­tive advantages. If your goal is to achieve operational excellence, where do you start? Here’s where the business value chain model is helpful.

The value chain model highlights specific activities in the business where competitive strategies can best be applied (Porter, 1985) and where informa­tion systems are most likely to have a strategic impact. This model identifies specific, critical leverage points where a firm can use information technology most effectively to enhance its competitive position. The value chain model views the firm as a series or chain of basic activities that add a margin of value to a firm’s products or services. These activities can be categorized as either primary activities or support activities (see Figure 3.9).

Primary activities are most directly related to the production and distribu­tion of the firm’s products and services, which create value for the customer. Primary activities include inbound logistics, operations, outbound logistics, sales and marketing, and service. Inbound logistics includes receiving and storing ma­terials for distribution to production. Operations transforms inputs into finished products. Outbound logistics entails storing and distributing finished products. Sales and marketing includes promoting and selling the firm’s products. The ser­vice activity includes maintenance and repair of the firm’s goods and services.

Support activities make the delivery of the primary activities possible and consist of organization infrastructure (administration and management), human resources (employee recruiting, hiring, and training), technology (improving products and the production process), and procurement (purchasing input).

Now you can ask at each stage of the value chain, “How can we use information systems to improve operational efficiency and improve customer and supplier in­timacy?” This will force you to critically examine how you perform value-adding activities at each stage and how the business processes might be improved. You can also begin to ask how information systems can be used to improve the rela­tionship with customers and with suppliers who lie outside the firm’s value chain but belong to the firm’s extended value chain where they are absolutely critical to your success. Here, supply chain management systems that coordinate the flow of resources into your firm and customer relationship management systems that coordinate your sales and support employees with customers are two of the most common system applications that result from a business value chain analysis.

Using the business value chain model will also cause you to consider bench­marking your business processes against your competitors or others in related industries and identifying industry best practices. Benchmarking involves comparing the efficiency and effectiveness of your business processes against strict standards and then measuring performance against those standards. Industry best practices are usually identified by consulting companies, re­search organizations, government agencies, and industry associations as the most successful solutions or problem-solving methods for consistently and ef­fectively achieving a business objective.

Once you have analyzed the various stages in the value chain at your busi­ness, you can come up with candidate applications of information systems. Then, once you have a list of candidate applications, you can decide which to develop first. By making improvements in your own business value chain that your competitors might miss, you can achieve competitive advantage by attaining operational excellence, lowering costs, improving profit margins, and forging a closer relationship with customers and suppliers. If your competitors are making similar improvements, then at least you will not be at a competitive disadvantage—the worst of all cases!

Extending the Value Chain: The Value Web

Figure 3.9 shows that a firm’s value chain is linked to the value chains of its suppliers, distributors, and customers. After all, the performance of most firms depends not only on what goes on inside a firm but also on how well the firm coordinates with direct and indirect suppliers, delivery firms (logistics partners, such as FedEx or UPS), and, of course, customers.

How can information systems be used to achieve strategic advantage at the industry level? By working with other firms, industry participants can use infor­mation technology to develop industrywide standards for exchanging informa­tion or business transactions electronically, which force all market participants to subscribe to similar standards. Such efforts increase efficiency, making prod­uct substitution less likely and perhaps raising entry costs—thus discouraging new entrants. Also, industry members can build industrywide, IT-supported consortia, symposia, and communications networks to coordinate activities con­cerning government agencies, foreign competition, and competing industries.

Looking at the industry value chain encourages you to think about how to use information systems to link up more efficiently with your suppliers, stra­tegic partners, and customers. Strategic advantage derives from your ability to relate your value chain to the value chains of other partners in the process. For instance, if you are Amazon.com, you want to build systems that:

• Make it easy for suppliers to display goods and open stores on the Amazon site
• Make it easy for customers to pay for goods
• Develop systems that coordinate the shipment of goods to customers
• Develop shipment tracking systems for customers

Internet technology has made it possible to create highly synchronized in­dustry value chains called value webs. A value web is a collection of indepen­dent firms that use information technology to coordinate their value chains to produce a product or service for a market collectively. It is more customer driven and operates in a less linear fashion than the traditional value chain.

Figure 3.10 shows that this value web synchronizes the business processes of customers, suppliers, and trading partners among different companies in an industry or in related industries. These value webs are flexible and adaptive to changes in supply and demand. Relationships can be bundled or unbundled in re­sponse to changing market conditions. Firms will accelerate time to market and to customers by optimizing their value web relationships to make quick decisions on who can deliver the required products or services at the right price and location.

Source: Laudon Kenneth C., Laudon Jane Price (2020), Management Information Systems: Managing the Digital Firm, Pearson; 16^th edition.