The physical and virtual value chain model

Value chain analysis helps to describe the various separate activities within a firm and to assess their performance when combined into a system in producing value for money solutions.

According to the now-traditional model introduced by M. Porter [19], there are five categories of primary activities and four categories of support activities. This model helps top managers to pinpoint the key activities of the firm and their interrelations with others to yield maximum value for customers in comparison with competitors. It allows them to identify the core competencies required to perform in a given business.

The primary activities are the following:

► Inbound logistics receive, store, and distribute the inputs.

► Operations transform inputs into the final product or service through manufacturing, assembly, and packaging. Solectron has developed a unique competence as a manufacturer of computer hardware, for instance.

► Outbound logistics store and physically distribute the solution to the customer. Many Taiwanese firms such as Acer or Quanta, the largest notebook PC producers in the world, have built a strong competence on logistics thanks to the global business infrastructure of Taiwan.

► Marketing and sales make customers aware of the solution and provide them with the way to buy it. Dell has developed a competence in direct marketing while Microsoft has a strong competence in brand building.

► Services maintain or increase the value of the solution through installation, maintenance, or training. WilTel Communications, an American network services provider for heavy bandwidth users, such as global telecommunications and media and entertainment companies, has won many awards recognizing the company's focus on customer service tools.

Each of those essential activities is linked to support activities of four different kinds.

► Procurement, whose mission is to acquire all the primary resources according to processes like purchasing. For example, Cisco's e-procurement system has allowed the company to grow while keeping its number of employees and costs under control.

► Technology development, which may concern either product development or process development. As we will see later, the technology development activity is driven by the technology investments made either internally through funding the R&D organization or externally to outsource or buy new technologies.

► Human resources management, to recruit, to manage, and to develop firm personnel. Typically all the major information-based service vendors, such as IBM, Accenture, or Cap Gemini Ernst and Young, are nurturing their best engineers or project managers. As one executive of Accenture declared: "Our skills are our people and our assets are their knowledge in conception, developing and implementation of solutions for our customers" [20].

► Infrastructure, which sustains the organization and the firm culture, including departments like accounting and finance, legal, and quality control. For instance, Texas Instruments (TI) has strengthened its legal competence, in order to assert its patent rights more aggressively. In 1999, a U.S. district court ruled that Hyundai must pay $1 billion over 10 years to license TI DRAM. Over the last 15 years, it is estimated that the semiconductor manufacturer has collected a total of more than $4 billion in royalty payments.

The value chain model was developed originally in the 1980s. It needs to be complemented, because today we are increasingly living in a world of information, sometimes called the marketspace, where products and services exist as digital information. This is the world of electronic commerce and information-based services, where the raw material is information that can be turned into new services and can be delivered through phone lines, cables, TV, or the Internet.

It is important to understand that information-based solutions obey different rules than physical solutions. Most notably, they allow radical economies of scale because, unlike physical assets, information is not depleted by their consumption;it can be duplicated at almost no variable cost and thus can been offered through an almost infinite number of transactions. Furthermore, the transaction costs keep decreasing steeply as the processing capacity per unit of microprocessors doubles every 2 years. Today, it costs less than 1 cent to keep information about a single customer as compared to about $1 per customer in the mid-1960s.

However, the value chain model treats information as a supporting element in the value adding process, not as a source of value in itself for the customer. In order to understand and to pinpoint the various technological competences required to create value with information, as well as to build a sustainable competitive advantage, top managers need to build a virtual value chain model that mirrors the physical value chain (Figure 2.6) [21].

First, firms must view physical operations more effectively through large-scale information systems, which coordinate activities in the physical value chains. A good example, also available for consumers, is electronic tracking of packages or material from one place to another, all over the world and in real time.

The second step is to substitute virtual activities for physical ones, thus creating a parallel value chain in the marketspace. For instance, when Rockwell developed its new K56 modem, it moved one key element of the value chain—product development—into the marketspace. Rather than create national product teams, Rockwell established a virtual team to develop the

Virtual Value Chain Model
Figure 2.6 Combining physical and value chain analysis. (After: [21].)

modem, located in three different locations, communicating and working together through a highly powerful and sophisticated CAD/CAM global network.

In the virtual world, the design team can transcend the limitations of time and space that characterize management in the physical world. They build and test prototypes, share design and data with colleagues around the world over a computer network 24 hours a day, and receive customer feedback from the other side of the world.

All elements of the physical value chain can be moved in the virtual value chain. For example, many maintenance operations on industrial equipment are performed automatically through network services from one remote control location.

The last step is to extract information of one stage of the virtual value chain and turn it into new spin-off products or services. For example, parcels automated tracking data used originally for internal logistics can be repackaged and made available (or sold) on line to consumers. Similarly, digitally captured product designs can be converted or adapted as multimedia software for PC or video game stations. That has worked quite well for Ubisoft whose game, "Enter the Matrix," was the number-one selling video game worldwide and the fastest selling movie-based video game in history. The game is directly using the actors, sets, and crew from the blockbuster film, The Matrix Reloaded, and includes some footage shot exclusively for the game.

Finally, a firm is usually part of a bigger value system, where various suppliers and distributors are also involved in making and delivering a solution to the final customer. Value chain analysis positions the firm within the total value process according to its current competencies as well as its influence on the other components of the industry value chain.

For instance, in the multimedia markets, contents are more important than containers as key resources. Firms that control exclusive rights over movies, sports, text, fundamental information, or uncommon talent have a strong competitive advantage in the multimedia value chain. Accordingly, they are in the best position to get the maximum value from other firms. The importance of content explains why some multimedia containers or carrier firms are buying content producers, like Viacom's acquisition of Paramount, or Time Warner's purchase of Turner Corporation, or making alliances, like Vodafone with Disney Corp.

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  • Nunzio
    What is physical valur chain?
    2 years ago
  • Fikru
    What is physical,virtual and combined value chain?
    1 year ago
  • luwam
    How do you understand the virtual value chainExplain with example.?
    12 months ago

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