Tag: online shopping

Traditional Retailing

Traditional retailing refers to the practice of selling products or services through physical stores, such as department stores, specialty shops, and boutiques. It is a long-established method of commerce that has been around for centuries.

In traditional retailing, customers visit a physical store to browse, try on, or examine products before making a purchase. Retailers stock their stores with inventory based on their target audience and demographic, and employ sales associates to assist customers with their shopping experience. This approach allows customers to have a more personalized and interactive experience with the products and the staff.

Traditional retailing advantages:

• Personalized customer service:

Customers can receive personalized assistance from sales associates, who can provide recommendations, answer questions, and address concerns.

• Tangible experience:

Customers can see, touch, and try on products before making a purchase, allowing them to make a more informed decision.

• Social experience:

Shopping in physical stores can be a social experience, allowing customers to shop with friends or family and enjoy the atmosphere of the store.

• Immediate gratification:

Customers can take the products home with them immediately, rather than having to wait for shipping.

• Brand recognition:

Physical stores can help build brand recognition and loyalty through visual merchandising and customer service.

Traditional Retailing Disadvantages:

• Limited geographic reach:

Physical stores are limited to their local customer base and may not be accessible to customers in other locations.

• Limited operating hours:

Physical stores have fixed operating hours, which may not be convenient for all customers.

• Higher overhead costs:

Physical stores require high overhead costs, such as rent, utilities, and staffing.

• Limited product range:

Physical stores have limited space for inventory and product display, which may restrict the range of products available for customers.

• Competition from e-retailers:

With the rise of e-commerce, traditional retailers face increasing competition from online retailers, who offer convenience and accessibility to customers.

E-Retailing

E-retailing, also known as online retailing or e-commerce, refers to the practice of selling products or services through digital channels, such as websites, mobile apps, social media platforms, or marketplaces. It is a rapidly growing method of commerce that has revolutionized the way people shop.

In e-retailing, customers can browse, select, and purchase products or services online using a computer or mobile device. E-retailers typically maintain an online store where customers can view product information, images, and reviews, and make a purchase using a secure payment system. E-retailers can also leverage technology to offer personalized recommendations, optimize the shopping experience, and provide fast and reliable shipping.

E-retailing Advantages:

• Convenience and accessibility:

Customers can shop from anywhere and at any time, making it more convenient and accessible for busy or remote customers.

• Wide range of products and brands:

E-retailers can offer a wider range of products and brands than physical stores, as they are not limited by physical space.

• Price comparison:

E-retailers can offer price comparison options, allowing customers to easily compare prices across different products and retailers.

• Lower overhead costs:

E-retailing requires lower overhead costs than traditional retailing, as there is no need for physical stores or high staffing levels.

• Global reach:

E-retailers can reach a global customer base, allowing businesses to expand their reach beyond their local area.

e-Retailing Disadvantages:

• Lack of tangible experience:

Customers cannot touch, try on, or examine products before making a purchase, which may lead to uncertainty or dissatisfaction.

• Delayed gratification:

Customers have to wait for shipping or delivery, which may take longer than the immediate gratification of buying in-store.

• Potential for fraud:

E-retailing is susceptible to fraud and security breaches, as sensitive information such as credit card details may be vulnerable to theft.

• Competition from other e-retailers:

With the rise of e-commerce, the competition between e-retailers has intensified, making it challenging for businesses to differentiate themselves.

• Technical issues:

E-retailing relies heavily on technology, which can lead to technical issues such as website crashes or payment processing errors.

Key differences between Traditional Retailing and e-retailing:

• Physical presence:

Traditional retailing requires a physical store presence, while e-retailing can be done entirely online.

• Overhead costs:

Traditional retailing involves high overhead costs, such as rent, utilities, and staffing, while e-retailing requires fewer overhead costs.

• Customer experience:

Traditional retailing offers a more personal and interactive customer experience, while e-retailing provides convenience and accessibility.

• Product range:

E-retailing offers a wider range of products and brands, while traditional retailing has limited space for inventory and product display.

• Geographic reach:

E-retailing allows businesses to reach a global customer base, while traditional retailing is limited to the local customer base.

Comparison	Traditional Retailing	E-Retailing
Physical Presence	Requires a physical store presence	Can be done entirely online
Overhead Costs	Involves high overhead costs, such as rent, utilities, and staffing	Requires fewer overhead costs
Customer Experience	Offers a more personal and interactive customer experience	Provides convenience and accessibility
Product Range	Has limited space for inventory and product display	Offers a wider range of products and brands
Geographic Reach	Is limited to the local customer base	Allows businesses to reach a global customer base

A Web system architecture is the underlying design and organization of a web-based system, including the technologies, protocols, and components that enable its functionality. The architecture of a web system determines how the different components interact with each other, how data is transmitted, and how the user interface is presented.

Key Components of Web System Architecture:

• Client-Side Components:

These are the components that run on the client-side, which is typically the user’s computer or device. Client-side components include web browsers, scripting languages, and user interface components such as buttons and menus.

• Server-Side Components:

These are the components that run on the server-side, which is typically a remote server or cloud-based system. Server-side components include web servers, application servers, and databases.

• Communication Protocols:

These are the protocols that govern how data is transmitted between the client-side and server-side components. The most common communication protocols used in web system architecture include HTTP, HTTPS, and WebSockets.

• Data Formats:

These are the formats used to represent and transmit data between the client-side and server-side components. Common data formats used in web system architecture include JSON, XML, and CSV.

• APIs:

APIs, or Application Programming Interfaces, are the interfaces that enable communication and data exchange between different components of the web system. APIs provide a standardized way for applications and services to interact with each other.

• Security:

Web system architecture must also include security mechanisms to protect against threats such as hacking, data breaches, and other cyber attacks. Security mechanisms can include encryption, authentication, and access control.

Types of Web System Architecture:

• Client-Server Architecture:

This is the most common type of web system architecture, where the client-side and server-side components are separate entities. The client-side component typically consists of a web browser, while the server-side component includes a web server, application server, and database.

• Single-Page Applications (SPA):

This type of web system architecture is designed to provide a more responsive user interface, where the user interface is loaded once and then updated dynamically without requiring a full page refresh. SPA is typically implemented using JavaScript frameworks such as React and Angular.

• Microservices Architecture:

This architecture is designed to break down a large, monolithic application into smaller, independent services that can be developed and deployed separately. Each microservice is responsible for a specific function or feature, and communication between services is typically done using APIs.

• Progressive Web Apps (PWA):

PWAs are web applications that are designed to provide a native app-like experience on mobile devices. PWAs use a combination of web technologies such as HTML, CSS, and JavaScript, along with features such as offline caching and push notifications.

e-Commerce

E-commerce, or electronic commerce, refers to the buying and selling of goods and services over the internet. It encompasses a wide range of online business activities, including retail shopping, banking, investing, and rentals. E-commerce allows businesses to reach a global audience, operate 24/7, and reduce operational costs through automated processes. It includes various models like Business-to-Consumer (B2C), Business-to-Business (B2B), Consumer-to-Consumer (C2C), and Consumer-to-Business (C2B). Key components of e-commerce include online marketplaces, payment gateways, and digital marketing. The rise of mobile commerce and social media integration has further expanded the e-commerce landscape, making it a vital part of the modern economy and transforming traditional retail practices.

Functions of e-Commerce:

• Online Retail (E-Tailing):

Selling products directly to consumers through online platforms, bypassing physical stores.

• Electronic Payments:

Facilitating secure online transactions through various payment methods such as credit/debit cards, digital wallets, and online banking.

• Supply Chain Management:

Managing the flow of goods, services, and information from suppliers to customers, optimizing inventory, order fulfillment, and delivery processes.

• Digital Marketing:

Promoting products or services through digital channels like social media, search engines, email marketing, and targeted advertising.

• Customer Relationship Management (CRM):

Managing interactions with current and potential customers to improve relationships, enhance satisfaction, and drive sales.

• Data Analytics:

Collecting, Analyzing, and interpreting data to gain insights into customer behavior, market trends, and business performance, enabling data-driven decision-making.

• Mobile Commerce (M-Commerce):

Conducting e-commerce transactions using mobile devices such as smartphones and tablets, allowing customers to shop anytime, anywhere.

• Security and Privacy:

Implementing measures to safeguard sensitive information, including secure payment processing, encryption, authentication, and compliance with data protection regulations like GDPR.

e-Business

E-business, short for electronic business, refers to conducting various business activities using the internet and related digital technologies. This encompasses online transactions, communication, collaboration, and management of business processes. E-business involves a wide range of operations, including online retail (e-commerce), online services, digital marketing, customer relationship management (CRM), supply chain management, and more. It allows companies to reach a global audience, streamline operations, reduce costs, and enhance customer experiences. E-business has revolutionized traditional business models by enabling swift and efficient transactions, real-time communication, and data-driven decision-making. It continues to evolve with advancements in technology, shaping the landscape of modern commerce and offering new opportunities for innovation and growth.

Functions of e- Business:

• Online Transactions:

Facilitating the buying and selling of goods and services over the internet, including online payments and order processing.

• Digital Communication:

Using digital channels such as email, instant messaging, and video conferencing for internal and external communication.

• Virtual Collaboration:

Enabling teams to collaborate remotely through online collaboration tools, shared documents, and project management platforms.

• Electronic Customer Service:

Providing customer support through digital channels like chatbots, helpdesk software, and online FAQs.

• Electronic Marketing:

Promoting products or services through digital marketing channels such as social media, search engines, and email campaigns.

• Data Management:

Collecting, storing, and analyzing data related to customers, transactions, and operations to gain insights and inform decision-making.

• Supply Chain Integration:

Integrating digital technologies to manage the flow of goods, services, and information across the supply chain, from sourcing to delivery.

• Cybersecurity:

Implementing measures to protect digital assets, including data, networks, and systems, from unauthorized access, cyberattacks, and data breaches.

Key differences between e-Commerce and e-Business

Aspect	E-Commerce	E-Business
Scope	Online transactions	Digital operations
Focus	Buying/selling goods	Overall business
Interaction	Transactional	Holistic
Revenue Stream	Sales	Diverse
Technology Usage	Transactional tools	Broad tech adoption
Customer Relationships	Transaction-based	Comprehensive
Market Reach	Targeted audience	Broad customer base
Functionality	Selling platform	Business operations
Integration	External	Internal and external
Data Utilization	Transaction data	Business analytics
Operational Impact	Sales efficiency	Overall efficiency
Strategy	Sales-driven	Business strategy
Growth Potential	Limited	Scalable
Innovation Focus	Product offerings	Business processes
Competitive Advantage	Product selection	Business agility

There is no one answer about what is competitive advantage or one way to measure it, and for the right reason. Nearly everything can be considered as competitive edge, e.g. higher profit margin, greater return on assets, valuable resource such as brand reputation or unique competence in producing jet engines. Every company must have at least one advantage to successfully compete in the market. If a company can’t identify one or just doesn’t possess it, competitors soon outperform it and force the business to leave the market.

There are many ways to achieve the advantage but only two basic types of it: cost or differentiation advantage. A company that is able to achieve superiority in cost or differentiation is able to offer consumers the products at lower costs or with higher degree of differentiation and most importantly, is able to compete with its rivals.

In business, a competitive advantage is the attribute that allows an organization to outperform its competitors. A competitive advantage may include access to natural resources, such as high-grade ores or a low-cost power source, highly skilled labor, geographic location, high entry barriers, and access to new technology.

The following diagram illustrates the basic competitive advantage model-

1. External Changes

(i) Changes in PEST factors

PEST stands for political, economic, socio-cultural and technological factors that affect firm’s external environment. When these factors change many opportunities arise that can be exploited by an organization to achieve superiority over its rivals. For example, new superior machinery, which is manufactured and sold only in South Korea, would result in lower production costs for Korean companies and they would gain cost advantage against competitors in a global environment. Changes in consumer demand, such as trend for eating more healthy food, can be used to gain at least temporary differentiation advantage if a company would opt to sell mainly healthy food products while competitors wouldn’t. For example, Subway and KFC.

If opportunities appear due to changes in external environment why not all companies are able to profit from that? It’s simple, companies have different resources, competences and capabilities and are differently affected by industry or macro environment changes.

(ii) Company’s ability to respond fast to changes

The advantage can also be gained when a company is the first one to exploit the external change. Otherwise, if a company is slow to respond to changes it may never benefit from the arising opportunities.

2. Internal Environment

(i) VRIO resources

A company that possesses VRIO (valuable, rare, hard to imitate and organized) resources has an edge over its competitors due to superiority of such resources. If one company has gained VRIO resource, no other company can acquire it (at least temporarily). The following resources have VRIO attributes:

• Intellectual property (patents, copyrights, trademarks)
• Brand equity
• Culture
• Know-how
• Reputation

(ii) Unique competences

Competence is an ability to perform tasks successfully and is a cluster of related skills, knowledge, capabilities and processes. A company that has developed a competence in producing miniaturized electronics would get at least temporary advantage as other companies would find it very hard to replicate the processes, skills, knowledge and capabilities needed for that competence.

(iii) Innovative capabilities

Most often, a company gains superiority through innovation. Innovative products, processes or new business models provide strong competitive edge due to the first mover advantage. For example, Apple’s introduction of tablets or its business model combining mp3 device and iTunes online music store.

Types of Competitive Advantage

1. Porter has identified 2 basic types of competitive advantage: cost and differentiation advantage.

1. Cost advantage

Porter argued that a company could achieve superior performance by producing similar quality products or services but at lower costs. In this case, company sells products at the same price as competitors but reaps higher profit margins because of lower production costs. The company that tries to achieve cost advantage (like Amazon.com) is pursuing cost leadership strategy. Higher profit margins lead to further price reductions, more investments in process innovation and ultimately greater value for customers.

2. Differentiation advantage

Differentiation advantage is achieved by offering unique products and services and charging premium price for that. Differentiation strategy is used in this situation and company positions itself more on branding, advertising, design, quality and new product development (like Apple Inc. or even Starbucks) rather than efficiency, outsourcing or process innovation. Customers are willing to pay higher price only for unique features and the best quality.

The cost leadership and differentiation strategies are not the only strategies used to gain competitive advantage. Innovation strategy is used to develop new or better products, processes or business models that grant competitive edge over competitors.

Customer-to-Customer (C2C) e-commerce refers to online transactions where individual consumers buy and sell goods or services directly to and from each other through digital platforms. These platforms act as intermediaries, facilitating the exchange of products or services between individuals, without the involvement of businesses as sellers. Examples of C2C e-commerce platforms include online marketplaces like eBay, Craigslist, and Facebook Marketplace, where individuals can list items for sale, negotiate prices, and complete transactions. C2C e-commerce enables individuals to monetize unused or unwanted items, find unique goods, and engage in peer-to-peer commerce, fostering a dynamic and decentralized marketplace driven by consumer-to-consumer interactions.

Characteristics of Customer-to-Customer (C2C) e-commerce:

1. Peer-to-Peer Transactions:

C2C e-commerce involves direct transactions between individual consumers, bypassing traditional business intermediaries.

2. Individual Sellers:

In C2C e-commerce, individuals act as both sellers and buyers, listing items for sale or auction and purchasing goods from other individuals.

3. Online Marketplaces:

C2C e-commerce platforms provide digital marketplaces where individuals can list items for sale, browse listings, and communicate with other users.

4. Variety of Products:

C2C platforms offer a wide range of products and services, including used goods, handmade items, collectibles, and unique or niche products.

5. User-Generated Content:

C2C e-commerce relies on user-generated content, including product listings, descriptions, images, and reviews, to facilitate transactions and build trust among users.

6. Informal Transactions:

Transactions in C2C e-commerce platforms often involve informal negotiations, haggling over prices, and flexible payment and delivery arrangements.

7. Community Engagement:

C2C platforms foster community engagement and interaction among users through features such as forums, messaging, and social sharing, enhancing the overall user experience.

8. Trust and Reputation:

Trust and reputation play a crucial role in C2C e-commerce, as buyers rely on seller ratings, reviews, and feedback to assess reliability and credibility before making purchases.

Types of Customer-to-Customer (C2C) e-commerce:

1. Online Classifieds:

Platforms like Craigslist and Gumtree allow individuals to list items for sale or trade in local or regional markets, facilitating C2C transactions.

2. Online Auctions:

Websites such as eBay enable individuals to auction off goods to the highest bidder, creating dynamic marketplaces for buying and selling a wide range of products.

3. Peer-to-Peer Rental:

C2C rental platforms like Airbnb and Turo enable individuals to rent out their properties, vehicles, or other assets to other consumers for short-term use.

4. Freelance Services:

Online platforms such as Upwork and Fiverr connect individuals seeking freelance work with those offering services such as graphic design, writing, programming, and digital marketing.

5. Peer-to-Peer Lending:

Peer-to-peer lending platforms like Prosper and Lending Club allow individuals to lend money directly to other individuals or businesses in exchange for interest payments.

6. Ticket Resale:

C2C ticket resale platforms like StubHub and Ticketmaster Resale enable individuals to buy and sell tickets for events such as concerts, sports games, and theater performances.

7. Swapping and Bartering:

Online communities and platforms facilitate C2C exchanges through swapping and bartering of goods and services without the use of money.

8. Social Commerce:

Social media platforms like Facebook Marketplace and Instagram enable individuals to buy and sell goods directly within their social networks, leveraging peer-to-peer connections for transactions.

Benefits of Customer-to-Customer (C2C) e-commerce:

1. Wide Product Selection:

C2C platforms offer a diverse range of products and services, including unique and niche items that may not be readily available through traditional retail channels.

2. Lower Prices:

Direct transactions between individuals often result in lower prices compared to buying from businesses, as sellers may offer used or second-hand items at discounted rates.

3. Opportunity for Income:

C2C e-commerce provides individuals with an opportunity to monetize unused or unwanted items by selling them to other consumers, generating additional income.

4. Flexibility:

C2C platforms offer flexibility in terms of listing items for sale, setting prices, and negotiating with buyers, allowing individuals to control their selling process.

5. Community Engagement:

C2C e-commerce fosters community engagement and interaction among users, creating a sense of belonging and facilitating communication and collaboration.

6. Market Research:

Buyers can access valuable market insights and trends by browsing listings and observing buying behaviors on C2C platforms, helping them make informed purchasing decisions.

7. Environmental Benefits:

C2C e-commerce promotes sustainability by extending the lifespan of products through reuse and recycling, reducing waste and environmental impact.

8. Empowerment:

C2C e-commerce empowers individuals to become entrepreneurs and build their own businesses, regardless of geographical location or traditional barriers to entry, fostering economic empowerment and entrepreneurship.

Challenges of Customer-to-Customer (C2C) e-commerce:

1. Trust and Security:

Establishing trust between buyers and sellers can be challenging in C2C transactions, as individuals may be concerned about fraud, scams, or receiving misrepresented goods.

2. Quality Control:

Maintaining product quality and consistency can be difficult in C2C e-commerce, as sellers may offer used or second-hand items with varying levels of condition and reliability.

3. Payment Risks:

C2C transactions may involve risks related to payment processing, including fraudulent transactions, payment disputes, and chargebacks, posing challenges for both buyers and sellers.

4. Logistics and Shipping:

Managing shipping and delivery logistics can be complex in C2C e-commerce, especially for individual sellers who may lack access to affordable shipping services or struggle with packaging and fulfillment.

5. Marketplace Competition:

C2C platforms often face intense competition from other online marketplaces and traditional retail channels, making it challenging for sellers to attract buyers and stand out in the crowded marketplace.

6. Regulatory Compliance:

C2C e-commerce platforms must comply with various regulations and legal requirements related to consumer protection, taxation, and online transactions, which can be complex and costly to navigate.

7. Customer Service:

Providing satisfactory customer service and support can be challenging in C2C transactions, as sellers may lack the resources or expertise to address buyer inquiries, complaints, or issues effectively.

8. Seller Reputation:

Building and maintaining a positive seller reputation is crucial in C2C e-commerce, as buyers rely on seller ratings, reviews, and feedback to assess credibility and trustworthiness, posing challenges for new or inexperienced sellers.

Electronic commerce, or e-commerce, (e-Commerce) is a type of business model, or segment of a larger business model, that enables a firm or individual to conduct business over an electronic network, typically the internet. Electronic commerce operates in all four of the major market segments: business to business, business to consumer, consumer to consumer, and consumer to business. It can be thought of as a more advanced form of mail-order purchasing through a catalog.

Types of e-Commerce

There are 6 basic types of e-commerce

1. Business-to-Business (B2B)
2. Business-to-Consumer (B2C)
3. Consumer-to-Consumer (C2C)
4. Consumer-to-Business (C2B)
5. Business-to-Administration (B2A)
6. Consumer-to-Administration (C2A)

1. Business-to-Business (B2B)

Business-to-Business (B2B) e-commerce encompasses all electronic transactions of goods or services conducted ​​between companies. Producers and traditional commerce wholesalers typically operate with this type of electronic commerce.

                     

Figure: B2B Communication

2. Business-to-Consumer (B2C)

The Business-to-Consumer type of e-commerce is distinguished by the establishment of electronic business relationships between businesses and final consumers. It corresponds to the retail section of e-commerce, where traditional retail trade normally operates.

These types of relationships can be easier and more dynamic, but also more sporadic or discontinued. This type of commerce has developed greatly, due to the advent of the web, and there are already many virtual stores and malls on the Internet, which sell all kinds of consumer goods, such as computers, software, books, shoes, cars, food, financial products, digital publications, etc.

Figure: B2C Communication

3. Consumer-to-Consumer (C2C)

Consumer-to-Consumer (C2C) type e-commerce encompasses all electronic transactions of goods or services conducted ​​between consumers. Generally, these transactions are conducted through a third party, which provides the online platform where the transactions are actually carried out.

 Figure: C2C Communication

4. Consumer-to-Business (C2B)

In C2B there is a complete reversal of the traditional sense of exchanging goods. This type of e-commerce is very common in crowd sourcing based projects. A large number of individuals make their services or products available for purchase for companies seeking precisely these types of services or products.

Examples of such practices are the sites where designers present several proposals for a company logo and where only one of them is selected and effectively purchased. Another platform that is very common in this type of commerce are the markets that sell royalty-free photographs, images, media and design elements, such as iStockphoto.

Figure: C2B Communication

5. Business-to-Administration (B2A)

This part of e-commerce encompasses all transactions conducted online between companies and public administration. This is an area that involves a large amount and a variety of services, particularly in areas such as fiscal, social security, employment, legal documents and registers, etc. These types of services have increased considerably in recent years with investments made in e-government.

Figure: B2A/C2A Communication

6. Consumer-to-Administration (C2A)

The Consumer-to-Administration model encompasses all electronic transactions conducted between individuals and public administration.

Examples of applications include:

Education: disseminating information, distance learning, etc.

Social Security: through the distribution of information, making payments, etc.

Taxes: filing tax returns, payments, etc.

Health: appointments, information about illnesses, payment of health services, etc.

Both models involving Public Administration (B2A and C2A) are strongly associated to the idea of efficiency and easy usability of the services provided to citizens by the government, with the support of information and communication technologies.

An extranet is a controlled private network that allows access to partners, vendors and suppliers or an authorized set of customers normally to a subset of the information accessible from an organization’s intranet. An extranet is similar to a DMZ in that it provides access to needed services for authorized parties, without granting access to an organization’s entire network. An extranet is a private network organization.

Historically the term was occasionally also used in the sense of two organizations sharing their internal networks over a VPN.

During the late 1990s and early 2000s, several industries started to use the term ‘extranet’ to describe centralized repositories of shared data (and supporting applications) made accessible via the web only to authorized members of particular work groups – for example, geographically dispersed, multi-company project teams. Some applications are offered on a software as a service (SaaS) basis.

Advantage of Extranet

• Exchange large volumes of data using Electronic Data Interchange (EDI)
• Share product catalogs exclusively with trade partners
• Collaborate with other companies on joint development efforts
• Jointly develop and use training programs with other companies
• Provide or access services provided by one company to a group of other companies, such as an online banking application managed by one company on behalf of affiliated banks.

Disadvantage of Extranet

• Extranets can be expensive to implement and maintain within an organization (e.g., hardware, software, employee training costs), if hosted internally rather than by an application service provider.
• Security of extranets can be a concern when hosting valuable or proprietary information.

Issues in Extranet

Apart for advantages there are also some issues associated with extranet. These issues are discussed below:

1. Hosting

Where the extranet pages will be held i.e. who will host the extranet pages. In this context there are two choices:

2. Host it on your own server.

Host it with an Internet Service Provider (ISP) in the same way as web pages.

But hosting extranet pages on your own server requires high bandwidth internet connection which is very costly.

3. Security

Additional firewall security is required if you host extranet pages on your own server which result in a complex security mechanism and increase work load.

4. Accessing Issues

Information cannot be accessed without internet connection. However, information can be accessed in Intranet without internet connection.

5. Decreased Interaction

It decreases the face to face interaction in the business which results in lack of communication among customers, business partners and suppliers.

A company is in essence a collection of activities that are performed to design, produce, market, deliver and support its product (or service). It’s goal is to produce the products in such a way that they have a greater value (to customers) than the orginal cost of creating these products. The added value can be considered the profits and is often indicated as ‘margin’. A systematic way of examining all of these internal activities and how they interact is necessary when analyzing the sources of competitive advantage. A company gains competitive advantage by performing strategically important activities more cheaply or better than its competitors. Michael Porter’s value chain helps disaggregating a company into its strategically relevant activities, thereby creating a clear overview of the internal organization. Based on this overview managers are better able to assess where true value is created and where improvements can be made.

Porter’s Value chain Model

 

One company’s value chain is embedded in a larger stream of activities that can be considered the supply chain or as Porter mentions it: the Value System. Suppliers have a value chain (upstream value) that create and deliver the purchased inputs. In addition, many products pass through the value chain of channels (channel value) on their way to the buyer. A company’s product eventually becomes part of its buyer’s value chain. This article will not go into the entire supply chain (from suppliers all the way to the end-consumer), but rather focuses on one organization’s value chain. The value chain activities can be divided into two broader types: primary activities and support activities.

Primary Activities

The first are primary activities which include the five main activities. All five activities are directly involved in the production and selling of the actual product. They cover the physical creation of the product, its sales, transfer to the buyer as well as after sale assistance. The five primary activities are inbound logistics, operations, outbound logistics, marketing & sales and service. Even though the importance of each category may vary from industry to industry, all of these activities will be present to some degree in each organization and play at least some role in competitive advantage.

1. Inbound Logistics

Inbound logistics is where purchased inputs such as raw materials are often taken care of. Because of this function, it is also in contact with external companies such as suppliers. The activities associated with inbound logistics are receiving, storing and disseminating inputs to the product. Examples: material handling, warehousing, inventory control, vehicle scheduling and returns to suppliers.

2. Operations

Once the required materials have been collected internally, operations can convert the inputs in the desired product. This phase is typically where the factory conveyor belts are being used. The activities associated with operations are therefore transforming inputs into the final product form. Examples: machining, packaging, assembly, equipment maintenance, testing, printing and facility operations.

3. Outbound Logistics

After the final product is finished it still needs to finds it way to the customer. Depending on how lean the company is, the product can be shipped right away or has to be stored for a while. The activities associated with outbound logistics are collecting, storing and physically distributing the product to buyers. Examples: finished goods warehousing, material handling, delivery vehicle operations, order processing and scheduling.

4. Marketing & Sales

The fact that products are produced doesn’t automatically mean that there are people willing to purchase them. This is where marketing and sales come into place. It is the job of marketers and sales agents to make sure that potential customers are aware of the product and are seriously considering to purchase them. Activities associated with marketing and sales are therefore to provide a means by which buyers can purchase the product and induce them to do so. Examples: advertising, promotion, sales force, quoting, channel selection, channel relations and pricing. A good tool to structure the entire marketing process is the Marketing Funnel.

5. Service

In today’s economy, after-sales service is just as important as promotional activities. Complaints from unsatisfied customers are easily spread and shared due to the internet and the consequences on your company’s reputation might be vast. It is therefore important to have the right customer service practices in place. The activities associated with this part of the value chain are providing service to enhance or maintain the value of the product after it has been sold and delivered. Examples: installation, repair, training, parts supply and product adjustment.

Support Activities

The second category is support activities. They go across the primary activities and aim to coordinate and support their functions as best as possible with eachother by providing purchased inputs, technology, human resources and various firm wide managing functions. The support activities can therefore be divided into procurement, technology development (R&D), human resource management and firm infrastructure. The dotted lines reflect the fact that procurement, technology development and human resource management can be associated with specific primary activities as well as support the entire value chain.

1. Procurement

Procurement refers to the function of purchasing inputs used in the firm’s value chain, not the purchased inputs themselves. Purchased inputs are needed for every value activity, including support activities. Purchased inputs include raw materials, supplies and other consumable items as well as assets such as machinery, laboratory equipment, office equipment and buildings. Procurement is therefore needed to assist multiple value chain activities, not just inbound logistics.

2. Technology Development (R&D)

Every value activity embodies technology, be it know how, procedures or technology embodied in process equipment. The array of technology used in most companies is very broad. Technology development activities can be grouped into efforts to improve the product and the process. Examples are telecommunication technology, accounting automation software, product design research and customer servicing procedures. Typically, Research & Development departments can also be classified here.

3. Human Resource Management

HRM consists of activities involved in the recruiting, hiring (and firing), training, development and compensation of all types of personnel. HRM affects the competitive advantage in any firm through its role in determining the skills and motivation of employees and the cost of hiring and training them. Some companies (especially in the technological and advisory service industry) rely so much on talented employees, that they have devoted an entire Talent Management department within HRM to recruit and train the best of the best university graduates.

4. Firm Infrastructure

Firm infrastructure consists of a number of activities including general (strategic) management, planning, finance, accounting, legal, government affairs and quality management. Infrastructure usually supports the entire value chain, and not individual activities. In accounting, many firm infrastructure activities are often collectively indicated as ‘overhead’ costs. However, these activities shouldn’t be underestimated since they could be one of the most powerful sources of competitive advantage. After all, strategic management is often the starting point from which all smaller decisions in the firm are being based on. The wrong strategy will make it extra hard for people on the workfloor to perform well.

Linkages within the Value Chain

Although value activities are the building blocks of competitive advantage, the value chain is not a collection of independent activities. Rather, it is a system of interdependent activities that are related by linkages within the value chain. Decisions made in one value activity (e.g. procurement) may affect another value activity (e.g. operations). Since procurement has the responsibility over the quality of the purchased inputs, it will probably affect the production costs (operations), inspections costs (operations) and eventually even the product quality. In addition, a good working automated phone menu for customers (technology development) will allow customers to reach the right support assistant faster (service). Clear communication between and coordination across value chain activities are therefore just as important as the activities itself. Consequently, a company also needs to optimize these linkages in order to achieve competitive advantage. Unfortunately these linkages are often very subtle and go unrecognized by the management thereby missing out on great improvement opportunities.

In the end, Porter’s Value Chain is a great framework to examine the internal organization. It allows a more structured approach of assessing where in the organization true value is created and where costs can be reduced in order to boost the margins. It also allows to improve communication between departments. Combining the Value Chain with the VRIO Framework is a good starting point for an internal analysis. In case you are interested in the entire supply chain, you could repeat the process by adding the value chains of your company’s suppliers and buyers and place them in front and behind your own company’s value chain.