An Introduction to Value Chain Approach

Dr.Kedar Karki

The virtual value chain, created by John Sviokla and Jeffrey Rayport, is a
business model describing the dissemination of value-generating information
services throughout an Extended Enterprise. This value chain begins with the
content supplied by the provider, which is then distributed and supported by
the information infrastructure; thereupon the context provider supplies actual
customer interaction. It supports the physical value chain of procurement,
manufacturing, distribution and sales of traditional companies.

To illustrate the distinction between the two value chains consider the
following: “when consumers use answering machines to leave a message, they
are using an object that is both made and sold in the physical world, however
when they buy electronic answering services from the phone company they are
using the marketspace—a virtual realm where products and services are digital
information and are delivered through information-based channels.” (Rayport
et al. 1996) There are many businesses that employ both value chains including
banks which provide services to customers in the physical world at their branch
offices and virtually online. The value chain is separated into two separate
chains because both the marketplace (physical) and the marketspace (virtual)
need to be managed in different ways to be effective and efficient (Samuelson
1981). Nonetheless, the linkage between the two is critical for effective supply
chain management.

New developments lead to new strategies

In the last decade the advancement of Information Technology (IT) and the
development of various concepts in manufacturing, like Just In Time (JIT) have
led to the situation where businesses no longer focus on purely the physical
aspect of the value chain as the virtual value chain is equal in importance.

Michael Porter, creator of the value chain, stated that there is no value added
by the Internet itself, however the Internet should be incorporated into the
business’ value chain. As a result the Internet affects primary activities and the
activities that support them in numerous ways. Porter describes the value chain
in the following:

“The value chain requires a comparison of all the skills and resources the firm
uses to perform each activity.”

The products and services the business supplies to the market need to conform
to a channel that fits the customer’s needs. Therefore this channel controls the
strategy of the business. The channel comprises different events, and each of
these events should be in accordance to the overall strategy of the business.

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In the virtual value chain (VVC), information has become a dynamic element in
the formation of a business’ competitive advantage. The information collected
is utilized to generate innovative concepts and ‘new knowledge’. This
translates to a new value for the consumer. An examination of the VVC model
informs the business to what function they have in the chain, and if they are
not currently offering services that are information based (i.e. Internet
services), how they can make the transition to the information based model.

In the virtual value chain the ‘virtual’ indicates that the value adding steps are
performed with information. The transfer of information between all events
and among all members is a fundamental component in using this model. In the
VVC the creation of knowledge/added value involves a series of five events:
gathering, organization, selection, synthesization, and distribution of
information. The completion of these five events, allows businesses to
generate new markets and new relationships within existing markets. The
process of a business refining raw material into something of value and the
sequence of events involved is similar to that of a business collecting
information and adding value through its cycle of events.

Stages of the value adding information process

Businesses implement value-adding information by using the three stages of the

Rayport and Sviokla model:

1. Visibility – By using information businesses learn the ability to view

physical operations more effectively. This means that the foundation for
the virtual value chain is used to co-ordinate the activities of the
physical value chain. Furthermore, with the assistance of IT, it is then
fully possible to plan, implement, and assess events with greater
precision and speed.
2. Mirroring Capability – Businesses duplicate their once physical activities
for virtual, by producing a parallel value chain in the marketspace. In
other words, the business moves the value adding activities from the
marketplace to the marketspace.
3. New Customer Relationships – Businesses present value to the customer
by new means and in new fashions. IT creates value in the marketspace.
The new relationship between business and customer is strongly based
on using IT. This implies that products and services are presented by IT
and part of these products and services are in the form of bits.

Relevance to the business world

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The Virtual Value Chain has the benefit of having a view that encompasses the
entire network along with its strong employment of IT. The VVC model has a
strong relationship to the supply chain and the goal of that relationship is to
produce materials, information and knowledge for the market. IT maintains the
relationship among the members of the chain. The VVC model does not indicate
any shifts in the market, or how and when the customer’s needs will change.

New technological developments in IT are drastically changing the way

businesses operate. Each business’ internal and external relationships are
managed by IT and value adding and generation of ideas are relying more and
more on IT. This trend has led to a different approach to value chain thinking.
Using this approach Mary Cronin separates the VVC into three elements: inputs
from supplier, internal operations, and customer relations.

• The inputs from supplier element is focused of the Internet and how it
can add value to the business’s acquisition activities. In other words,
business’ with use of the Internet have the capability to find different
suppliers quickly (effective) and for different purposes (efficient).

• The internal operations element is in regards to the business’ value

adding events which are based on the effective procurement and
distribution of the information within the business. It is essential that
businesses can emulate this model because of the increasing large role
information plays in the business world. With use of the Internet, the
business can procure and distribute information globally with relative
ease and low cost.

• The customer relations element concentrates on applying the

information directly from the customers’ needs and attitudes about the
product or service to add value. The internet is a useful tool in acquiring
the direct information about the customer’s needs and attitudes. The
internet is also used to distribute information about the products and
services to the market (i.e. electronic catalogues). Following the
distribution, forums and discussion groups collect the necessary
information about the products and services that the business provides.

Management

Today managers need to concentrate on how their business creates value in

both the physical and virtual world. However, the methods for creating value
are different in these worlds. By careful interpretation of the differences and
interactions among the value adding events of the physical and virtual worlds,
managers can more clearly visualize the strategic issues facing the business.

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Managers must learn to utilize and value the virtual world of information. "By
thinking boldly about the integration of place and space," Sviokla and Rayport
comment, "executives may be able to create valuable digital assets that, in
turn, could change the competitive dynamics of industries." (Rayport et al.
1996) To properly use the information, that is to create value from it, managers
must explore the marketspace. Although the value chain or the marketspace is
similar to that of the marketplace, there is an increased dynamic involved. The
processes for transferring raw information to products and services are unique
to the information world.

The conventional value chain model uses information for solely support, not as
a source of value itself. However, with the arrival of the Internet the virtual
value chain has been enabled, allowing businesses to use information for the
creation of innovative products and services that are exclusive to the
marketspace. An example of using the VVC to create such services includes the
Federal Express Corporation which recently created a customer designed
website to track packages by using their air bill number. FedEx has been able to
capitalize using the VVC by adding value for the customer (for free) and in turn
has increased customer loyalty in an intensely competitive market. In this
increasingly information based economy managers must extract value from
both the physical and virtual value chains to succeed.