Value creation and value chain analysis

Value chain

A model that considers how supply chain activities can add value to products and services delivered to the customer.

How businesses create value within their markets is fundamental to their success. Digital technologies have a significant role in changing the balance of value creation within a market, so the extent of this change and how well it has been implemented must be evaluated as part of environment analysis. Value delivered is dependent on the difference between the consumer benefit created by the business and the costs incurred in producing or delivering the value as suggested by Figure 2.4. You can see that arguably the biggest impact of the Internet is the capability to reduce costs through reducing intermediaries such as physical stores and also through changing the intangible benefits. Together, these combine to form the online value proposition, as explained in Chapter 4. To pass on the reduced costs of dealing direct it will be necessary for retailers, banks and other companies to change their structure and accounting practices to isolate online channels as a separate profit centre.

Michael Porter's value chain (VC) is a well-established concept for considering key activities that an organisation can perform or manage with the intention of creating value for customers (Porter, 1980). We can identify an internal value chain within the boundaries of an organisation and an external value chain where activities are performed by partners. By analysing the different parts of the value chain managers can redesign internal and external processes to improve their efficiency and effectiveness. Traditional value chain analysis (Figure 2.5(a)) of the internal value chain distinguishes between primary activities which contribute directly to getting goods and services to the customer (such as inbound logistics, including procurement, manufacturing, marketing and delivery to buyers, support and servicing after sale) and support activities which provide the inputs and infrastructure that allow the primary activities to take place.

Intangible benefits

• Purchase experience (content, customisation, choice, ease of use)

Tangible benefits

• Product quality

• Product range and customisation

• Service quality

• Fulfilment

Intangible benefits

• Purchase experience (content, customisation, choice, ease of use)

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