10 Steps of How to Implement the Value Chain Concept Successfully

 The value chain is one of the most powerful strategic tools. Michael Porter (the originator of the value chain concept) uses this tool to define what strategy is. However, the work of Porter looks more focused on strategy formulation than on strategy execution. There is a gap between understanding the concept of the value chain and implement it. So, let’s go to analyze how to implement in 10 steps the value chain tool successfully.

Infographic adapted from SCOR Process Framework (Supply Chain Council): How to Implement the Value Chain

The 10 steps of value chain

The first step is defining the Business Strategy of the firm. I mean defining our main Value Discipline (Operational Excellence, Customer Intimacy or Product Leadership according to Michael Treacy and Fred Wiersema) or our Core Business (Infrastructure Management, Customer Relationship Management or Product Innovation according to John Hagel III and Marc Singer). Be aware that both are quite similar strategic frameworks to define our strategy. The good point of these approaches to strategy is that those are probably more specific than Porter Generic Strategies (Cost Leadership, Differentiation, and Focus). This is important because the Value Discipline and Core Business frameworks make a better fit between strategy and processes/activities. Processes/activities are the key element for implementation.

In 1996, Porter in his famous HBR article “What Is Strategy?” declared that Operational Effectiveness is not a strategy. He explained that Japanese companies rarely have strategies and those were based on Operational Effectiveness in the 1980s. He suggested that competitors could quickly imitate best practices, management techniques, and so on. However, after two decades from the publication of the article the reality is other. Japanese companies (Toyota, Honda, Bridgestone, Canon, Ricoh, Seiko, Sony, Panasonic, Nikon, Yamaha, etc.) still enjoy of an important Sustainable Competitive Advantage. So, according to the facts we should consider that Operational Excellence is a working strategy.

Some of the Operational Effectiveness tools (benchmarking, best practices, performance management, change management, and so on) are helping us to implement the concept of the value chain despite the Value Discipline chosen.

The second step could be called Configuration. Now, we are aligning the Value Discipline chosen with some of the main functional strategies (Business Model, Marketing, Production, Logistics/Stock, and Performance). This step helps us to define our business strategy deeper in order to have an actionable strategy.

Many firms used to fail in the strategy execution rather than in the strategy formulation process. Failed strategies that demand a turnaround used to involve re-focusing on target industries, product, markets or activities of the value chain. So, the configuration step is one of the most important steps analyzing the value chain. Usually a BCG Matrix or other strategic portfolio tools should be used to get a deeper inside.

The third step is Segmentation. There is a common mistake that is “trying to be everything to all customers.” This used to mean that we are not able to excel in any particular segment because we lose focus. Without the correct focus (segmentation), the value chain implementation will have a high risk of failing.

Then the fourth step should be Process Reengineering. There are a few common mistakes that make firms fail in performing re-engineering:

• Limit the concept of process re-engineering to improve current activities (tactical level): Why do not you use re-engineering  to perform different activities? (Strategic level as Porter suggests.) We can use re-engineering at tactical level, strategic level or both. The strategic level should have higher organizational impact. Are you measuring how many of your reengineering initiatives belong to tactical and strategic level?
• Lack strategic thinking on the value chain: Focusing too much in operational processes and neglecting the strategic activities. We should wonder ourselves: what are the key activities that our value proposition is requiring?
• Fail to see the potential of outsourcing: Some people could be afraid of outsourcing because outsourcing could be interpreted as we are not able to improve those processes or activities internally. Indeed, it is very difficult to compete with specialized firms which offer outsourcing services. Therefore, it is a worthy solution to use outsourcing firms in order to leverage us on their Competitive Advantages. Outsourcing is a tool that can bring massive value to our firm (focus, expertise, reduce complexity, flexibility, savings, and cash-flow improvements.)
• Reduce re-engineering tools to process mapping and the ISO norm: Modern re-engineering processes cannot be understood without using analytical and improving techniques like Lean and Six Sigma. Furthermore, other complementary management tools are needed like performance management, best practices, project management, or change management.
• Substitute process knowledge for common sense: Inexperienced reengineering people are not likely able to detect problems, make a diagnostic, and fix the problem quickly. So, their job is based mainly on interviewing users and asking them for solutions. The value that they add is “using common sense” to the input received from the business users. Common sense is necessary, but it is not enough to generate a Competitive Advantage. Highly effective re-engineering required of a deep knowledge of the best class processes (supply chain process, sales process, etc.)

• Reinventing the wheel in process re-engineering: There are a few well-developed process frameworks from prestigious organizations (APICS Supply Chain Council – SCC, American Productivity & Quality Center – APQC or Value Chain Group – VCG). However, there are people who do not follow any proven process framework. In those cases they are probably reengineering based on common sense what will take too much time, cost and the result would be poorly compared with competitors using those frameworks.

• Assume that organizations need a specialized process re-engineering team to lead re-engineering rather than support it: I think that is more powerful having the owners of the processes leading and performing the re-engineering tasks. When the re-engineering come from users used to bring more powerful organizational changes and the reengineering is better embedded into the organization. Leading the re-engineering process from inside the areas (supply chain, customer relationship, human resources, etc.) is an indicator of the firm maturity and the quality on the staff. For this approach, organizations need a re-engineering team that train users and offer support rather than decide what must be changed.

Probably the best indicator that we have a solid business strategy and value chain execution is having the capability to replicate successfully strategies in different geographies (e.g. Zara/Inditex or McDonalds). Be aware that replication is quite difficult to achieve without robust and well defined processes.

Fifth step used to be ignoring for many organizations. Timeline is a key element to properly execute activities. Do you think is the same using 5 minutes for machines’ setup times than 5 hours? Do you think is the same unload trucks from 7:00 AM to 12:00 AM than allowing unload any time of the day? Obviously not, so process without timeline means processes not well defined. This will create coordination problems between different areas, friction between people performing sequential activities, problems measuring the important responsiveness KPIs, etc. Probably the most important issue to not defining timelines is that we would be unable to implement the “sense of urgency” in our organization. I mean urgency to satisfy customers’ needs, urgency to invoice customers on time, urgency to receive customers’ payments that improve our cash flow, and so on.

The next step is the sixth, Performance Management (Metrics). Nowadays, it is well known what it is a Key Performance Indicator (KPI). Nonetheless, many firms are not able to answer the following questions:

• What are the strategic attributes of the company?
• What are the overall health, diagnostic and root cause KPIs for any strategic attribute?
• How many KPIs should we have?
• What KPIs should we measure?

The answer of those questions is important in order to be sure that we have in place the correct KPIs to monitor our value chain. We should remember that “what it is not measured, it is not improved it.”

Once that we are able to define our KPIs, the next questions are:

• Where is the information that we need?
• How can we extract that information?
• What are the dashboards or scorecards that we are using to present and communicate properly the KPIs?

Seventh step, Benchmarking: This management tool allows us to compare the performance of our main processes or activities with those of other comparable organizations (internal or external). So, this tool is allowing us to prioritize our value chain initiatives according to the higher gap between our current situation and the potential future state (higher potential benefits) and lower implementation risks.

Eighth step, Best Practices: As Michael Porter said: we could argue that the rapid diffusion of best practices means that competitor can quickly copy them. However, thinking in that way we would likely underestimate implementation diversity and complexity. Thus, we would not consider the competency to implement as source of Competitive Advantage. Why is implementation a source of Competitive Advantage? Because the implementation capability is very complex to imitate and used to make a huge difference between firms competing. For instance, if we ask a few chefs to cook a written recipe, with similar conditions (ingredients, oven, etc.), we will likely realize that the result of each chef can be reasonably similar but very different. Imagine the differences in results with the following circumstances that affect defining and executing the company’s value chain:

• Activities: There are more than 1.000 activities (APQC) and like Porter mentioned trade-offs arise from activities themselves.
• Best practices: There are hundreds of best practices, and trade-offs arise from best practices themselves too.
• IT systems: Companies have different IT systems (Google, SAP, Oracle, Microsoft, etc.) with specific customizations what means that not all the best practices can be implemented in all the IT platforms or in the same way.
• People: Each organization has different people with different mindsets and skills. So, the perceptions of which activities are an opportunity or which are risky rely on the teams of each particular firm.
• Culture: Each organization has its specific culture. For instance regarding innovation we have innovators, early adopters, laggards, and so on.

Other advantage of using best practices is that push us to monitor the external environment in which we are following competitors. Additionally, best practices should help us to think out the box and to foster the creation of our own best practices list which could mean performing different activities than our rivals.

When we are talking about strategy execution, the variable people cannot be missed. Thus, the step ninth is Organizational Design where we assess any gap between the current inventory of our skills and the competencies level.

Finally, the step tenth Change Management considers a much broader implementation concept than just people issues. This is the last step for the value chain implementation, but it is not the less important. It is usual to find failed value chain initiatives where the design team is just blaming users because they did not implement properly. It is true that end users are responsible for delivering results too, although it is well known that there are many handicaps to make things happen. Thus, the design team is responsible for having a change management program, and a periodic follow-up that guarantees the success of all the initiatives.

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• Posted by: Javier González Montané

https://strategok.com/

What Is Disintermediation? How Digital Transforms The Value Chain

Disintermediation is talked about in most cases as a form of disruption, however, you need to understand how value is created to get the heart of it.

A typical example is how farmers can sell direct to consumers through platforms rather than distribute their products through wholesalers and retailers. Another term frequently associated with disintermediation is direct to consumer business model.

Amazon founder, Jeff Bezos, who is known for historically eliminating the middleman to benefit the customer said, “Even well-meaning gatekeepers slow innovation.” If we want to continue to innovate at an accelerated rate, the gatekeepers must go.

Disintermediation Disrupts Markets

Disintermediation displaces the middlemen with the value chain and as a result, changes the dynamics with the market. These changes are classically driven changes in technology that enable value chains to be reconfigured.

The internet and the rise of digital platforms that can connect two-sides of a market have caused the displacement of many traditional intermediaries.

Benefits of Disintermediation

The opportunity is to deliver a product or service to a consumer with higher perceived value than an incumbent’s by changing the fundamental way it is delivered.

Each part of the supply involves time and money. Each intermediary will take add a margin to the product or service and hence the final cost to the consumer can have several layers of profits and costs associated with the value chain e.g. distribution, storage and transportation costs.

Cutting out the middlemen reduces the number of costs and often time to get to the consumer.

Disintermediation Examples

Disintermediation examples

The digitization of products has led to transforming physical products into zeros and ones, digits. Books, music and even money are now digitized and therefore easy to distribute.

Digital goods can be delivered over the internet either as a bundle or as a single unit (referred to as unbundling). Music tracks, video, software, newspapers, books are now easily distributed through multiple channels and viewable on a range of devices.

Disintermediation of the Newsagents and the Print industry

As the news became available online, the print and distribution of newspapers plummeted along with the number of newspaper companies. Many newsagents groups (shops selling newspapers and magazines) went out of business as a result of being disintermediated.

The decline of printed newspapers as a result of digitization of news and disintermediation of print.

Disintermediation of Travel Agencies

Travel agents used to be a familiar sight on every high street. However, the internet transformed the industry and the layers of intermediaries fell the wayside. Expedia and bookings.com made it easy for hotels to directly list their rooms on these sites and cut out the travel agents all together.

Disintermediation of Taxi Companies

Uber has grown rapidly from launch to now being a regular option for people seeking rides in over 60 Countries. The traditional taxi company and it’s associated costs of cars, an office and staff to man the phones have been replaced by the Uber app. A person seeking a ride can now find a driver easily within their vicinity. Consequently, the Uber business model results in only a fraction of markup to cover its costs and make a profit, therefore causing disintermediation in the taxi industry.

Disintermediation of Pet Stores and Wholesalers

Direct to consumer startup BarkBox identified the opportunity to serve just one demographic, die-hard dog lovers directly, with just one core product: its eponymous BarkBox. However, by doing so it cuts out the normal wholesaler and pet supply store.

Fintech and Disintermediation of Banks

Fintech through Big Data, Blockchain, Internet of Things (IoT), use of Cryptocurrencies, Artificial Intelligence (AI) and more effective exploitation of digital channels, social networking and mobile devices is disintermediating the financial services industry through innovation.

Robo Advisory is a term used to describe the automation of financial services traditionally provided by human financial advisors, which now can be done via code, and through an automated process.

Disintermediation vs Reintermediation

Disintermediation is enabled through digital platforms that connect two sides of a market and cut out the middlemen. As a result, the margins normally absorbed by the middlemen can lead to improved profits for the producer and often lower costs for consumers.

Reintermediation is the opposite of disintermediation. Reintermdiation involves the introduction of an intermediary, a middleman, between a supplier and a customer.

Quite often this happens because a company will outsource a service so that it can focus on its core activities, e.g. what it does best. Another reason for reintermediation is convenience and the ability to focus on one particular part of the value chain.

Reintermediation Examples

Levi Strauss & Co. didn’t score any points when it decided to shut out retailers from selling its blue jeans and other clothing online.

Initially, Levi Strauss thought it wanted to keep the eCommerce to itself. However, less than one year later and with declining sales, the $6 billion manufacturer, abruptly changed course.

Levi’s announced that it would quit direct sales on the Web and leave online selling of its clothing to retailers like J. C. Penney Co. and Macys.com. However, later it reintroduced its online store but maintained distribution with its retail partners.

A great example of reintermediation is Deliveroo, a company founded in 2013. Deliveroo is an online food delivery company that partners with restaurants across cities to manage the whole takeaway process from restaurant pickup to customer delivery, again through a mobile app.

Deliveroo has allowed more restaurants to offer a delivery service where the traditional internal cost of doing so proved a barrier. Also, it provided an outsourced more efficient delivery option for restaurants offering their own service.

Without Deliveroo, a delivery would require the investment costs of a vehicle(s), employment of driver(s) and logistics planning.

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Aggregator Business Model: What Is It And How It Works

 The aggregator business model has transformed industries decimating some firms.

Taxis, hotels, groceries, insurance, travel and many other industries now have a dominant aggregator.

The Value Proposition of An Aggregator Model

aggregator business model

Customer Value Proposition

The value for a customer is based on time, money and trust.

1. TIME: Let’s face it hopping across sites and trying to compare prices would be very time-consuming. Aggregator business models save customers time. This not only reduces the search time but also offers the consumer an instant and often, customizable list of similar products/services to compare.

2. EASE OF USE: It would also be a challenge to then collate and makes sense of all that data. You’d have to create tables with features and prices. By using comparison tables and filters aggregators help customers to make selections based on their needs. In turn, this makes it easier to make decisions.

3. TRUST: Often aggregators also aggregate reviews from a multitude of customers or have their own rating systems. This provides a large pool of reviews and helps the customer to choose a trusted product or service.

4. MONEY. By comparing the prices across the market and balancing that with reviews, customers get the best price vs quality assurance or the best good/supplier for their budget.

Value Proposition To Partners

Partners benefit from having to get customers without the cost of marketing. Since most marketing activities work on acquiring a small percentage of customers which then finally purchase there is often a high-cost per acquisition.

There are also costs associated with all the activities related to the systems and staff needed to market a product or service.

The benefit to a partner is that they only pay a commission when a customer buys.

Customers make purchases through the online aggregators and in this way, the providers get more customers without spending an arm and a leg for the marketing. With each order, the aggregator firm gets the commission.

Why Digital Has Fueled The Aggregator Model

A theory is a hypothesis that can be tested and validated scientifically. Some have coined the term aggregator theory, but it is not really a theory just a set of reasons why technology has enabled new forms of business, new digital business models.

Platform economics neatly explain aggregators, and these theories date back 50 years.

On-demand digital business models

The features of digital technology that enable the aggregator business model. Digital enables aggregation models to scale because of the following reasons:

1. Direct access to consumers across multiple channels at scale (Marketing). In other words, there are about 7.5Bn people on the internet that you have potential access to. Previously you couldn’t get close to marketing or selling to that many people in the physical world.
2. The immediacy and digital distribution effect (Distribution and On-demand). Digital products can be distributed at low costs (near zero costs per unit) but not zero costs. However, compared to physical distribution this has been a game-changer e.g. digitalization and distribution of books, music, news, and video are all examples where previous physical distribution and storage costs were high.
3. Transactions Costs. In a digital world the total costs associated with transactions are relatively low but not zero. As an example, platforms that use Stripe or PayPal are subject to their commissions.
4. The modularity of digital. Digital apps can be changed in an instant and this will be reflected in the user experience. Modularity provides greater degrees of personalization that cannot easily be attained in the physical world.
5. Zero/Low marginal costs of scaling digital services or products. There are zero marginal costs for copying a music file or the details for a room booking. However, the cost of marketing is not a zero marginal cost – important to remember.
6. Demand-driven multi-sided networks with decreasing costs. The network effects are based on acquiring more customers who in turn help to create referrals and more marketing momentum, thus lowering the cost of acquisition. Eventually, as firm scales, the costs per customer e.g.fixed costs diminish, costs of acquisition lower and so it becomes more profitable. However, as we can see with Netflix if new competition enters the market, they push up the cost of acquisition and thus counter the network effects.

Physical Value Chain

In most consumer markets there are normally three players: suppliers, distributors, and consumers/users.

Profits prior to the internet and digital went to integrators integrate. As an example, those that integrated supply and distribution or distribution and consumers

Print Industry: Writer and Editors produce the content which was then aggregated into a newspaper (the distribution vehicle for content). Because of the audience, they commanded they were able to sell space in a newspaper to advertisers.

Music Industry: Companies like Sony controlled the artists and the production of the records/DVDs.

Digital Disrupts The Value Chain

Winners in today’s digital economy succeed by providing seamless experiences where they offer value within a supply chain either through disintermediation or bundling or unbundling.

In other words, digital enables a firm to find a gap in the value chain and then fulfill it at a low cost.

Google and content

• Content now is digital and fluid. It can be easily indexed, categorized, combined and distributed.
• Google unbundles the newspaper industry allowing people to quickly find articles and content as they needed it – in the form of single pages. Advertisers thus shifted from newspapers to Google as well to new digital aggregators e.g. Huffington Post.
• Content creation shifted from journalists to bloggers and experts across various fields. The cost of production and distribution dropped as access to technologies to produce and distribute content became accessible to all, it became democratized.

The same is true of video production hence the rise of YouTube and other social networks like TicToc.

How does an Aggregator Business Model Work?

First of all, the aggregator firm creates a network of partnerships that supply the data to the aggregator. The aggregator and partner agree on terms (commission charges) and then set up systems e.g. data exchange.

Terms usually include

• Branding Terms.
• The standardized quality required by the aggregator.
• The Commission, or
• Take-Up rate.
• Other terms depending on the industry and the aggregator involved.

Often, the aggregator model works because all the main players operate on the platform and the aggregator then commands a significant value benefit to the customer.

How do aggregator Sites make money?

The revenue generation in an aggregator business model is similar to that of the marketplace business model. The partners of the company are the source of the revenue. The company generates revenue through commissions which are paid in one of two ways:

1. The company makes a mark-up on the partner price. The partner fixes the price and the aggregator firm quotes the final price to the customers after adding their mark-up e.g. 20%.
2. The company takes a commission rate per purchase from the partner. This is the same as an affiliate commission but usually has stricter terms and conditions because of the data.

Different types of aggregators

Digital goods can be replicated at zero cost, meaning they are often non-rival. The role of geographic distance changes as the cost of distribution for digital goods and information is approximately zero.

Let’s break this down a bit:

1. The goods sold by an aggregator.
2. Distribution costs
3. Transactions

I’ll use a few different examples.

The overriding premise is that platform companies aggregate demand to disintermediate the distributors (which is now possible because of zero-cost distribution) and win on direct customer experience.

The value platforms offer goes without saying, the ease of use, speed and convenience overrides previous value offered through physically bounded firms.

1. Goods sold and marginal costs

The Cost of Goods Sold (COGS) refers to the direct costs of producing the goods sold by a company.

In the case of Netflix there are two types of Cost of Goods:

1. Content purchase which is then amortized (debt in current liabilities and long-term).
2. Production of Netflix originals.

If we take the first case for Netflix in 2019 they had $4.4 billion in current content liabilities and $3.3 billion in non-current content liabilities. The Cost of Revenue for streaming in 2019 was 62%.

Replication is near zero, production is not near zero and streaming through a platform can’t happen without infrastructure and therefore are not near zero. A digital product doesn’t distribute itself.

2. Distribution Costs

The internet is an easy way to distribute digital products. That’s true, but it isn’t free by a long shot. If you look a the cost of the infrastructure needed for Netflix to stream in over 160 Countries and the degree of localization needed there are significant costs. Technology and development cost $1.5 billion for Netflix in 2019. Even Uber has a figure of over $1 billion. The difference is the perspective. Operational costs = the platform – the technical staff and infrastructure – these are the cost of goods for a platform business – the platform.

3. Transaction Costs

Two types of costs are incurred with digital transactions. Usually, third-party commissions e.g. Stripe or PayPal. The second is fluctuations in exchange rates which often hit companies.

The emergence of music aggregators is a market response to the high level of transaction costs and bargaining asymmetry associated with selling digital music online. 

The Types of Aggregators

The aggregators can be classified based on the value chain – customers, partners and costs.

1. Single value chain offer or value chain integration.
2. No or low COGS vs high COGS.
3. Primary distribution or secondary.

What Are Some Examples of The Aggregator Business Model?

There are hundreds of aggregators, but here are some examples that illustrate how the aggregation model is playing out in different markets.

Digital music aggregation industry

Aggregation Business Model – music aggregators

Search Aggregators

Google is a search aggregator. Google indexes data across multiple industries and then use to present search, consumers, data that they are looking for. From hotel bookings to queries on weather to content…Google indexes the web and then monetizes this by giving opportunities for companies to be on page 1 in exchange for payment.

Travel Industry Aggregator Business Model

A travel aggregator is a website that searches for deals across multiple websites and shows you the results in one place. For example, if you wanted to find a cheap flight from New York City to London, you could sit down and check multiple airlines which would take ages. Alternatively, you could use a website like Skyscanner, which will check hundreds of airlines at once.

Taxi Aggregator Business Model

The Uber business model is an example of an aggregator business model within the taxi industry. Uber takes the services from the drivers and provides customers to them in exchange for a commission.

Uber has been the most influential taxi booking app. Uber provides personal as well as shared taxis. The company hires drivers who bring their own taxis. Uber does not have employees, it hires these drivers as service providers and provides them a platform where they could get more customers. Uber works on a commission basis. It charges up to 20-25% commission rate from the drivers and also earns revenue through promotional partnerships. There is also a price surge on holidays and during a certain period of the day.

How Blockchain will Be The Game Changer

Why do blockchains allow new startups to compete with the likes of Google and Facebook? Blockchains will change the aggregator business model to a distributed business model.

• Network Effects—Blockchains offer tokens (monetary incentive) which give early adopters greater upside the earlier they join the network.
• ML Data Advantage: Blockchains use a DLT (distributed ledger technology) architecture where data is shared and open, rather than a client-server architecture where data is closed and siloed.

Network Effects: Token-Based Incentivizes for Early Adopters

Before blockchains and the digital scarcity of tokens, it was difficult to attract early users to a new network. But now, a company can “pay” early adopters in a native token and those early adopters will be incentivized to increase the value of their tokens.

blockchain network effect

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