1) The Concept of Value Chain
Right off the bat, let’s ask this question- what do you think a value chain is? You can take x number of guesses, but if you think it estimates the value of something, you have hit the mark. Well…somewhat.
Simply put, the value chain in eCommerce explains how an idea is transformed into a consumable product and delivered to the end consumer. Before delving into the intricacies of an eCommerce value chain, let’s first understand what a value chain is.
The term ‘value chain’ is the brainchild of Professor Michael Porter, a Harvard professor of business management. He eternalized the concept in his best-seller- Competitive Advantage: Creating and Sustaining Superior Performance (1985).
Since then, the concept has swiftly evolved from classroom notes to a crucial business strategy balancing cost and profit for many organizations. Business owners mainly apply the concept to organizations, industries, and, recently, to eCommerce models to enhance competitive advantage.
Professor Porter classified a value chain as a series of processes undertaken by an organization to manufacture a product or service. These processes make a comprehensive system. It encompasses three business facets: inputs, outputs, and transformation. Each task between the input and output phase involves the procurement and consumption of resources.
Typically, resources in any industry include capital, raw materials, labor, equipment, land and buildings, administration, and management. Value is transferred at each stage of acquiring raw materials, designing and manufacturing the product, and distributing and marketing it.
Therefore, a value chain can be considered a business model that describes the complete set of activities and processes in making a product or service. More specifically, evaluating a company’s value chain can enhance business efficiency and increase profitability.
2) Detailed Overview of Value Chain in eCommerce
To understand the value of the value chain in eCommerce, rewind to 2020, when the pandemic began. Since then, the global market has witnessed financial crises, rising geopolitical changes, economic slumps, and climate change. Be it retail, industrial manufacturing, or eCommerce, each has been affected.
Since its conception, all eCommerce companies have engaged in various activities to deliver products to their clients. These activities include material acquisition, processing, manufacturing, and final delivery. Collectively, all these tasks fall under the purview of eCommerce value chain activities.
Before the .com boom in the early 2000s, the notion of value chains only applied to brick-and-mortar businesses and was fairly simple and clear. Commodities were manufactured in a factory, carried to a retail outlet, and then sold to a consumer. But this changed with the rise of the internet.
Rather than being delivered to a physical retail outlet, products are shipped to storage facilities or fulfillment hubs as inventories. They are purchased from online retailers and delivered directly from these storage or fulfillment facilities to customers.
Consumers don’t need to walk into a store to shop. Instead, they can browse and purchase anything from the comfort of their smartphones or computers. All of this is made possible through value chains, where companies assess their activities to provide the best product or services.
3) Why do Experts Consider the eCommerce Value Chain Important?
Experts of ‘value chain’ have further delved into the importance of value chain in eCommerce models and explained two important points.
First, a value chain improves the elementary feature of an eCommerce business which is to identify and meet customer priorities. By customer priorities, they mean things that customers will pay a premium for or switch to suppliers who have them. Examples include exciting products, eco-friendly goods, two-day deliveries, or branded items.
Second, the value chain proposes business owners transform customers’ yearnings into opportunities. They should communicate, produce, and deliver the product or service, giving them a reign over competitive advantage. They can leverage knowledge (Research and Development) and customer relationships in this case.
The value chain, therefore, is reconfigured to mobilize new players, resources, and personnel. You may already know some of them- 3PLs/4PLs, shipping companies, freight forwarders, shipping software, and dropshippers.
In eCommerce, a value chain model may follow the notion of ‘corporate value,’ i.e., meeting the objectives of individual stakeholders, including customers. The value of a product or software lies in combining benefits and costs with a company’s organizational structure and knowledge.
No wonder giant eCommerce corporations like Amazon, Walmart, and Alibaba are investing in R&D to develop newer ways to satisfy customers. The corporate value of the value chain ushers in productivity and cash-flow outputs. The knowledge component uses market intelligence to gather vital information.
Lastly, experts have identified a symbiotic relationship between eCommerce and the value chain. For example, a value chain emphasizes organizations’ structure and partnerships to provide customers free shipping or returns.
Similarly, electronic commerce has reengineered the value chain with just-in-time manufacturing and delivery, enhanced the supply chain, and changed the cost structure.
Therefore, the eCommerce value chain has moved away from the traditional model. Experts have concluded that the aim of a value chain in eCommerce is to enhance end-user value or satisfaction.
In this regard, it ropes in two other concepts: supply chain and logistics management. The supply chain manages enterprise functions beneficial in the long run, and logistics streamlines the stock and flow of goods in the supply chain.
But, it can be challenging to understand the proceedings of value chains in e-commerce and implement them. Further below, we present an in-depth knowledge of how the e-commerce value chain model functions.
4) The Key Components of an eCommerce Value chain
To understand the key components of the value chain, let’s go back to Professor Porter’s notes. He meticulously divided an organization's operations into two main categories: "primary" and "support."
We present them below as primary and secondary activities. Depending on the industry, the specific tasks in each category differs. In general, any value chain model in e-commerce will have the following steps:
4.1) Primary Activities
There are five aspects to primary activities. All of them are necessary for generating value and gaining a competitive advantage over other competition:
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Inbound logistics: Receiving stock, storage, and inventory management are all part of inbound logistics.
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Operations: Procedures for transforming raw materials into a final product are included in operations.
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Outbound logistics: Refers to the activities involved in getting a finished product to a customer.
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Marketing and Sales: Advertising, promotion, and pricing are all strategies used in marketing and sales to increase visibility and target the right customers.
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Services: Customer service, servicing, restoration, refund, and exchange are services that keep products running smoothly and improve the customer experience.
4.2) Secondary Activities
The purpose of secondary activities is to aid in the efficiency of primary activities. When the efficiency of all support activities becomes more productive, it enhances at least one of the five primary activities. A company's revenue statement usually indicates these support operations as overhead costs.
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Procurement: Refers to the process by which a corporation acquires raw materials.
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Technological development: During a company's research and development (R&D) phase, technological advancement is utilized to create and develop production procedures and automate processes.
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Human resource management (HR): It entails hiring and keeping workers engaged who will help to design, promote, and sell the product per the company's business plan.
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Infrastructure: Company systems and the composition of its management team, like strategy, accountancy, financing, and product testing, are examples of infrastructure.
5) The Interconnectedness of Value Chain and Supply Chain in eCommerce
In eCommerce, value and supply chains are two sides of the same coin. They are so intricately related that people sometimes use them interchangeably. However, there are a couple of conceptual differences between the two in an eCommerce model.
First, the value chain involves the steps in producing and manufacturing a finished product. But, the supply chain includes the services required to deliver it to the end customer.
In other words, the supply chain involves personnel and services for fulfilling customer orders, including order procuring, processing, fulfillment, and shipping. It also addresses a complex relationship between suppliers and the company.
Second, the value chain model explains ways to enhance product value as it passes through the various stages, from manufacturing to distribution. On the other hand, the supply chain represents ways to satisfy a customer as soon as an order is placed with an eCommerce company.
Supply chain management has six critical processes. Starting with sourcing products from suppliers at the optimal price and procuring goods or services aligning with company goals. Next comes conversion, transforming the item or raw materials into brand-distinguished products.
Then comes assembly and logistics. Assembly involves the movement of goods across long distances, staying at multiple warehouses and locations, and final packaging.
Logistics takes care of transportation from the first to the last mile of a delivery chain, handing the parcel to the customer. Lastly comes value-added services like hyperlocal deliveries or branded packaging.
In the supply chain, there is a constant flow of information, materials/products, and finances from suppliers to manufacturers, wholesalers to retailers/eCommerce companies, and customers.
Companies can evaluate activities and steps to improve the final product with a value chain analysis. With a supply chain, they can plan, coordinate and integrate the flow of stock and inventories within the company and among stakeholders. They can lower costs, improve product cycles, adapt to market changes, and garner profits.
6) An example of a Value Chain Model
To understand how a value chain works, let’s consider the example of the eCommerce giant Amazon. As part of its ambition to be the most client-centric corporation, the company follows some of the primary activities mentioned below:-
6.1) Inbound Logistics
Products supplied through Amazon's fulfillment services and data center resources that power Amazon Web Services (AWS) are the company's key inputs. Amazon can use its size as a major company to cut the cost per unit of items by outsourcing.
6.2) Operations
Amazon can go beyond in-house distribution capabilities thanks to co-sourcing and outsourcing from various local companies. Robotics is used at Amazon's 109 fulfillment centers to provide quick and cost-effective warehousing labor.
6.3) Outbound Logistics
This is the point at which Amazon converts its inputs into outputs. Amazon's actual product, its ecommerce marketplace, provides a secure venue for users and merchants to conduct e-commerce transactions. Their two-day delivery gives them a significant advantage over competitors.
6.4) Marketing and sales
In the last decade, Amazon spent billions on advertising and marketing as its principal marketing strategy. It effectively demonstrated a large corporation's economic power to preserve its position among the most recognized brands in the world. Amazon is noted for its easy return process and client satisfaction scores for AWS cloud services.
7) How to Conduct an eCommerce Value Chain Analysis
An analysis that evaluates every activity that contributes to a firm's value chain is known as a value chain model analysis.
eCommerce companies must conduct this analysis to determine where improvements can be made to increase brand image and customer value.
This helps executives see how each chain link contributes to or detracts from the end product and service. For example, an ecommerce value chain market analysis might suggest solutions to make tasks more effective, lower costs, improve product design, or boost product distinction.
Performing a value chain analysis consists of three steps:
Step 1: Determine the activities in the value chain
This initial step includes learning about the primary and secondary activities that go into generating a product or service. Because the interactions may differ, it's critical for organizations that provide various products or services to undertake value chain analysis for all of them.
Step 2: Determine the amount and value of various activities
The next stage is determining how each specified activity contributes to the e-commerce value chain process. It's also crucial to consider the costs associated with each operation, as lowering costs could increase the total transaction value.
Step 3: Look for ways to get a competitive edge
You may assess the value chain in electronic commerce from whichever competitive advantage you seek to create. For instance, if you are looking to cut costs, examine the value chain from the standpoint of lowering costs and enhancing efficiency.
In many cases, Research will reveal operations that can be outsourced or even deleted entirely to save money or bottlenecks in the production process that might be fixed to save time and money.
8) Final Words
Value chains in eCommerce facilitate the analysis of all operations involved in producing a product or service and the identification of cost-cutting techniques. You can streamline processes, remove waste, and boost profits using a value chain.
Further, it aids in getting relevant insights into inner processes that can improve the end customer's experience. Overall, value chain integrations in e-commerce have improved operational efficiencies. The result is that eCommerce companies are giving the most value to their customers for the least amount of capital investment.
9) FAQs
9.1) What is an eCommerce value chain?
The general concept of the value chain suggests all activities that go into making a finished product. The steps needed to create a product may differ for different companies. However, a mainstream outline includes designing the product, procuring raw materials, manufacturing, distribution, etc.
The value chain for eCommerce delves deeper into the specifics of an eCommerce supply chain. Herein comes all the activities that create the product and deliver it to the final customer. The value chain in eCommerce goes into the specifics of logistics, like warehousing, inventory management, transportation, shipping, etc. Herein comes all the activities that create the product and deliver it to the final customer.
9.2) What is an effective value chain model?
An effective value chain model visualizes all the activities involved in producing a product to reduce cost and increase competitive advantage. On paper, it may look like a series of diagrams and graphs or a computer simulation model, but the purpose remains the same.
By retracing each step, one can gain valuable insights into which activities add value to the product. It will also assist in identifying areas for improvement to gain a competitive edge and increase the profit margin.
9.3) How to build a value chain model?
A value chain has two sets of activities: primary and secondary. A simple value chain model can be a diagram representing information and data of these activities. To get a proper model, take into account the following factors.
One, identify all the activities involved in the production and work performed by the employees in your company. This will help you get a firm grasp of your operations and the areas where value is propositioned.
Two, once you have a list of all your activities, try classifying them into primary and secondary/support activities.
Three, describe (even if briefly) the activities and how they contribute to adding value. It can be something for ensuring quality, increasing operational efficiency, or making the product favorable to customers.
Four, determine the cost associated with each activity. This may include labor costs, subscriptions, permits, materials, tools, infrastructure, etc. Cost calculation is a central facet of a value chain analysis and must be performed carefully.
Five, when you have a visual diagram, look for areas where waste recurs. These may be activities where costs are high, but the value is relatively low. Consider tradeoffs carefully. You may not want to streamline or reduce the price of a unique activity or require more time to display value.