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Consumer benefit

Business costs

Value created

Figure 2.4 Value creation model

Secondary value chain activities

Human resources

Finance

Information systems

Inbound logistics

Production

Outbound logistics

Sales and marketing

Primary value chain activities

Market research

New product 'development/

Market products

Procure materials

Procure products

Manage selling and fulfilment

Figure 2.5 Two alternative models of the value chain: (a) traditional value chain model, (b) revised value chain model

Value can be created for the customer by reducing costs of providing goods and services and adding benefits for customers:

• within each element of the value chain such as procurement, manufacture, sales and distribution;

• at the interface between elements of the value chain such as between sales and distribution.

In equation form this is:

Value = (Benefit of each VC activity - its cost) + (Benefit of each interface between VC activities - its cost)

Rayport and Sviokla (1996) contend that the Internet enables value to be created by gathering, organising, selecting, synthesising and distributing information. They refer to a separate parallel virtual value chain mirroring the physical value chain. The virtual value chain involves electronic commerce used to mediate traditional value chain activities such as market research, procurement, logistics, manufacture, marketing and distributing. Michael Porter also stresses the importance of information:

because every [value chain] activity involves the creation, processing and communication of information, information technology has a pervasive influence on the value chain.

Porter (2001)

Understanding how Internet technologies can be used to process, transfer and share marketing-related information is vital to help Internet marketers evaluate and revise value chain activities. For example, if a grocery retailer shares information electronically with its suppliers about demand for its products, this can enhance the value chain of both parties since the cycle time for ordering can be reduced, resulting in lower inventory holding and hence lower costs for both. The retailer can also set up links between its online product catalogues and all appropriate comparison intermediaries for products using data transfer technologies such as XML. This is the mechanism used by shopping comparison sites such as Kelkoo and Pricerunner, so it is important for online retailers to evaluate this integration. If this work is not seen as important since it is not a traditional marketing activity, then the opportunities of increased online visibility and hence number of visitors and sales will be reduced. Retailer Tesco has created its Price Check initiative (www.tesco.com/pricecheck) to highlight its competitiveness by making its competitor price survey available online. Of course, the most obvious examples of value creation occur directly through the interface between the web site and the customer, for example through detailed product information, product selection guides, personalised product recommendations and online customer support facilities which involve reducing cost to serve and may have intangible benefits for the customer such as improved recommendations or decreasing the purchase time.

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