Exploiting Value Chain for Competitive Advantage

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IDENTIFYING VALUE

The intent of a value chain is the increase the value of the product or service. The sequence of activities required to design, produce and deliver goods or services to create markets is known as “Value Stream”. For a product, value stream encompasses raw material supplier, manufacturer and distribution networks.

In order for firms to compete effectively and survive in the global market, they must maintain and build relationships with a capable and competent network of suppliers and extract maximum value from these relationships. This part of the value chain can also be referred as upstream value chain. To gain the strategic advantage in the markets, it is widely observed that organizations try to optimize the upstream of the value chain. Organizations generally increase this value by either implementing supplier development programs in order to improve the performance of the supplier or by sourcing alternate raw material as input for the business. Also with the concept of shared economy getting popular, organizations try to increase the value of the upstream of that market if it is the supply side of the business.

For example, the 100 biggest U.S. manufacturers spent 48 cents out of every dollar of sales in 2002 to buy materials, compared with 43 cents in 1996, according to Purchasing magazine’s estimates in 2003. This cost sometimes includes the inefficiencies of the supplier. To reduce this cost, businesses must look into the suppliers’ efficiencies. Companies like Walmart, Toyota and Honda have already optimized the upstream of their value chain. As a result, Walmart can deliver everyday low pricing very efficiently and while U.S. automakers take two to three years to design new cars, Toyota and Honda have consistently been able to do so in just 12 to 18 months. As organizations optimize their own value addition activities, they start looking further into their suppliers’ operations to improve the efficiency of the whole value chain. Toyota and Honda have ensured that those measures and concepts that they use to optimize their operations are being followed in their suppliers operations too. This basically reduces the cost of the supplier and it results in the reduction of the cost of the raw material for the companies (Jeffrey K. Liker and Thomas Y. Choi, 2004).

There are some organizations which take a completely different approach for optimizing the upstream value chain. They source a completely alternate raw material as an input for the business. For example, in Aviation industry it was found that steel made aircrafts tough and durable but also costly, heavy and sluggish to handle. In order to make the aircrafts lighter and comparatively cheaper, industry has to find a new raw material. At that point of time industry came up with light weight and cheaper Aluminium as an alternative for the raw material. This gave the whole industry the cost benefit and helped the industry grow (Geoff Poulton, 2017). If we try to look at the petroleum industry, as the petroleum products have started becoming scarce and costly, companies like Tesla started moving towards alternate fuel sources for their automobile business. Because of the inefficiencies in the upstream, they have found altogether different raw material for their businesses. Netflix could also be one such company which followed the similar pattern. The content was developed in the big production houses only. That increased the cost of operation for players like Netflix which operate in the space. So Netflix started developing their own content in order to keep their cost of operation as low as possible. Many organizations have also started using plastic instead of metal and carbon-fibre instead of costlier steel. These organizations tried to alter their raw material. They moved upstream and altered the costlier raw material with the cheaper raw material to gain the strategic cost advantages.

Just like Netflix is gaining cost advantage through finding a different source of content, a few companies achieve differentiation advantage through creation of value adding policies and activities. Commercial companies are experiencing fast and significant changes, not least due to demographic shifts such as the ageing population and social transitions, such as towards the ‘sharing economy’. In many sectors this is leading to increased competition – sometimes from a completely unexpected angle as Uber, Airbnb, HelloFresh and Picnic demonstrate.

Uber and AirBnB created a new category of shared economy—around a different value chain. Not all travellers want to shell out large share of the vacation budget on just for using their room in the night, so why should they have to pay for it? Take away all the activities needed for a luxurious stay, or unnecessary services like room clean up, and you can create a different kind of value: low-cost houses of owners accessible to a wider customer base. This created a two-sided market so even the house owners could share their space for more income. Matching the value chain—the activities performed inside the company—to the customer’s definition of value has become conventional wisdom.

A company can sustain a premium price only if it offers something that is both valuable and unique to its customers. Creating more buyer value raises a customer’s willingness to pay (WTP). A consumer’s WTP is more likely to have an emotional or intangible dimension (Thomas Eisenmann, Geoffrey Parker, and Marshall W.Van Alstyne, 2006). Value adding activities of AirBnB are providing insurance to listed properties, enabling owners to list their space on the platform and earn rental money, providing cheap options to travellers to stay with local hosts, and facilitating the process of booking living space for travellers. Consider the enormous consequences of value chain thinking. The first is that you begin to see each activity not just as a cost, but as a step that has to add some increment of value to the finished product or service. Over time, this perspective has revolutionized the way organizations define their business (Joan Magretta, 2012).

The extent to which one group should be encouraged to swell through subsidization and how much of a premium the other side will pay for the privilege of gaining access to it has to be determined by the platform provider. Generally, the side which is more sensitive to price should be subsidized. The side that increases with the increase in quantity of users on the other side, should be charged additionally (Thomas Eisenmann, Geoffrey Parker, and Marshall W.Van Alstyne, 2006). If we look at AirBnB revenue model, it charges flat 10% commission from hosts upon every booking done through the platform and charges 3% of the booking amount as transaction