MM ELEC 3

E-COMMERCE

MODULE 17
VALUE CHAIN

The value chain is a model that describes different value-adding activities that
connect a company’s supply side with its demand side.
o We can identify an internal value chain within the boundaries of an
organization and an external value chain where activities are performed by
partners.
 By analyzing the different parts of the value chain managers can
redesign internal and external processes to improve their efficiency
and effectiveness.

Benefits for the customer are created by reducing cost and adding value:
o Within each element of the value chain such as procurement,
manufacture, sales and distribution
o At the interface between elements of the value chain such as between
sales
o Distribution

Internet technologies can reduce production times and costs by increasing the
flow of information as a way to integrate different value chain activities.
o The Internet enables value to be created by gathering, organizing,
selecting, synthesizing and distributing information.
 They refer to a separate parallel virtual value chain mirroring the
physical value chain.

The virtual value chain involves electronic commerce used to mediate traditional
value chain activities such as market research, procurement, logistics,
manufacture, marketing and distribution.
o The processing is machine-based or ‘virtual’ rather than paperbased.
 Human intervention is still required in many activities but the
‘virtuality’ of the value chain will increase as software agents
increasingly perform these activities.

Value stream
Value chain is the combination of actions required to deliver value to the
customer as products and services.
o It includes:
 The problem solving task - the processes of new product
development and production launch
 The information management task - the processes of order taking,
scheduling to delivery

Source: Chaffey, David. 2015. Digital Business and E-Commerce Management: Strategy, Implementation
and Practice, 6th Edition. Pearson
  The physical transformation task - the processes of transforming
raw materials to finished product delivered to customers

How can an organization positively impact on its value chain by investing in new
or upgraded information systems?
o Step 1. Assess the information intensity of the value chain (i.e. the level
and usage of information within each value chain activity and between
each level of activity).
 The higher the level of intensity and/or the higher the degree of
reliance on good quality information, the greater the potential
impact of new information systems.

o Step 2. Determine the role of IS in the industry structure. It is also

important here to understand the information linkages between buyers and
suppliers within the industry and how they and competitors might be
affected by and react to new information technology.

o Step 3. Identify and rank the ways in which IS might create competitive
advantage.
 High cost or critical activity areas present good targets.

o Step 4. Investigate how IS might spawn new businesses.

o Step 5. Develop a plan for taking advantage of IS, which is business

driven rather than technology driven.
 The plan should assign priorities to the IS investments which
should be subjected to an appropriate cost–benefit analysis.

Value stream analysis considers how the whole production and delivery process
can be made more efficient.
o They suggest that companies should map every activity that occurs in
creating new products and delivering products or services to customers
and then categorize them as:
 Those that create value as perceived by the customer.
 Those which create no value, but are required by product
development or production systems and so cannot immediately be
eliminated.
 Those that don’t add value, so can be immediately eliminated.

Value networks
Reduced time to market and increased customer responsiveness are not simply
the result of reviewing the efficiency of internal processes and how information
systems are deployed, but also result through consideration of how partners can
be involved to outsource some processes.
o As companies outsource more and more activities, management of the
links between the company and its partners becomes more important.

Source: Chaffey, David. 2015. Digital Business and E-Commerce Management: Strategy, Implementation
and Practice, 6th Edition. Pearson
 Value network management is the process of effectively deciding what to
outsource in a constraint-based, real-time environment based on fluctuation.
o Electronic communications have enabled the transfer of information
necessary to create, manage and monitor outsourcing partnerships.
 These links are also mediated through intermediaries known as
‘value chain integrators’ or directly between partners.

Partners of a value network

o (1) Supply side partners (upstream supply chain) such as suppliers,
business-to-business exchanges, wholesalers and distributors.
o (2) Partners that fulfil primary or core value chain activities. In some
companies the management of inbound logistics may be outsourced, in
others different aspects of the manufacturing process.
 In the virtual organization all core activities may be outsourced.
o (3) Sell side partners (downstream supply chain) such as
business-to-business exchanges, wholesalers, distributors and customers
(not shown, since conceived as distinct from other partners).
o (4) Value chain integrators or partners who supply services that mediate
the internal and external value chain.
 These companies typically provide the electronic infrastructure for a
company.

Virtual organization
 Virtual organization uses information and communications technology to allow it
to operate without clearly defined physical boundaries between different
functions.
o Virtualization is the process of a company developing more of the
characteristics of the virtual organization.

Supply chain management options can be viewed as a continuum between

internal control (‘vertical integration’) and external control through outsourcing
(‘virtual integration’).
o The intermediate situation is sometimes referred to as ‘vertical
disintegration’ or ‘supply chain disaggregation’.

Vertical integration
o It is the extent to which supply chain activities are undertaken and
controlled within the organization.

Virtual integration
o It is the majority of supply chain activities are undertaken and controlled
outside the organization by third parties.

Source: Chaffey, David. 2015. Digital Business and E-Commerce Management: Strategy, Implementation
and Practice, 6th Edition. Pearson
 Hayes and Wheelwright (1994) provide a useful framework that summarizes
choices for an organization’s vertical integration strategy.
o The three main decisions are:
 The direction of any expansion.
 Should the company aim to direct ownership at the upstream
or downstream supply chain?
 The extent of vertical integration.
 How far should the company take downstream or upstream
vertical integration?
 The balance among the vertically integrated stages.
 To what extent does each stage of the supply chain focus on
supporting the immediate supply chain?

Combining these concepts, we can refer to a typical B2B company.

o If it owned the majority of the upstream and downstream elements of the
supply chain and each element was focused on supporting the activities of
a B2B company, its strategy would be to follow upstream and downstream
directions of vertical integration with a wide process span and a high
degree of balance.
 Alternatively, if the strategy were changed to focus on core
competencies it could be said to have a narrow process span.

Using digital business to restructure the supply chain

Using digital communications to improve supply chain efficiency is dependent on
effective exchange and sharing of information.
o The challenges of achieving standardized data formats and data
exchange have given rise to the study of optimization of the information
supply chain.

Information supply chain (ISC) is an information- centric view of physical and

virtual supply chains where each entity adds value to the chain by providing the
right information to the right entity at the right time in a secure manner.
o ISCs create value for the collaborating entities by gathering, organizing,
selecting, synthesizing and distributing information.

The challenges to cultivating an ISC arise from both organizational and

technological perspectives.
o Agility and flexibility in both internal and inter- organizational business
processes are required to benefit from technology investments in ISCs.

Two different types of information sharing and coordination problems in the retail
and consumer goods industries:
o (1) the transactional information flow that allows for coordinating the
physical demand and supply chain (demand signals, forecasts, orders,
shipping, notifications, or invoices)

Source: Chaffey, David. 2015. Digital Business and E-Commerce Management: Strategy, Implementation
and Practice, 6th Edition. Pearson
 o (2) the contextual information flow that ensures that retailers and
manufacturers interpret data in the same way.

Data transfer options and standards which enable e-SCM

 EDI which is an established and relatively simple method of exchanging orders,
delivery notes and invoices.
 XML- or XML- EDI- based data transfer enables more sophisticated one-to-many
data transfers such as a request for orders being transmitted to potential
suppliers.
 Middleware or software used to integrate or translate requests from external
systems in real time so they are understood by internal systems and follow-up
events will be triggered.
 Manual email orders or online purchase through a traditional web- based
e-commerce store for B2B.

Typical benefits with respect to a B2B company include:

 Increased efficiency of individual processes
o If the B2B company adopts e-procurement this will result in a faster cycle
time and lower cost per order.
 Benefit: reduced cycle time and cost per order

 Reduced complexity of the supply chain

o This is the process of disintermediation.
 Here the B2B company will offer the facility to sell direct from its
e-commerce site rather than through distributors or retailers.
 Benefit: reduced cost of channel distribution and sale.

 Improved data integration between elements of the supply chain

o The B2B company can share information with its suppliers on the demand
for its products to optimize the supply process.
 Benefit: reduced cost of paper processing.

 Reduced cost through outsourcing

o The company can outsource or use virtual integration to transfer assets
and costs such as inventory holding costs to third-party companies.
 Benefits: lower costs through price competition and reduced spend
on manufacturing capacity and holding capacity.

 Innovation
o E-SCM should make it possible to be more flexible in delivering a more
diverse range of products and to reduce time to market.
 Benefit: better customer responsiveness

Source: Chaffey, David. 2015. Digital Business and E-Commerce Management: Strategy, Implementation
and Practice, 6th Edition. Pearson