Understanding eCommerce Value Chain & Its Importance

1) Overview of Value Chain in eCommerce in Detail

All kinds of organizations engage in a succession of activities to deliver products to their clients. These activities typically include material acquisition, processing, manufacturing, and then final delivery. Collectively, all these tasks are known as value chain activities. Before the .com boom in early 2000, 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 real retail outlet, things started getting delivered to storage facilities or fulfillment hubs. They were purchased from online retailers and delivered directly from these storage or fulfillment facilities. Consumers didn’t need to walk into a store to shop; instead, they could browse and purchase from the comfort of their own smartphone or computer.

All of this was made possible through the concept of value chains. Value chains can be pretty complicated to understand and implement especially in the eCommerce sector. By using appropriate instances of eCommerce companies and analyzing their value chain models, in this article we want to pass on in-depth knowledge about value-chain models and their application in real-life scenarios.

A business model that outlines the entire process of creating new products or services is known as a value chain. The stages involved in moving a product from conceptualization to distribution, and just about everything in between, like obtaining raw materials, manufacturing operations, and marketing activities make up a value chain for an organisation. The purpose of a value chain is to increase the value of a product at each stage before it is supplied to customers.

3) What are the Key Components of Value Chain

In the book “Competitive Advantage: Creating and Sustaining Superior Performance”, Michael E. Porter from Harvard Business School established the core concept of value-chain. Porter divided an organization's operations into two main categories: "primary" and "support," which we present below as primary and support activities. Depending on the industry, the specific tasks in each category differs. 

3.1) Primary Activities

There are 5 aspects to primary activities, which all are necessary for generating value and gaining competitive advantage over competition:

• Inbound logistics: Receiving, storage, and inventory management are all part of inbound logistics.
• Operations:  Procedures for transforming raw materials into a final product are included in operations. 
• Outbound logistics:  It refers to the activities involved in getting a finished product to a customer. 
• Marketing and Sales: Advertising, promotion, and pricing are all strategies used in marketing and sales to increase visibility and target the right customers. 
• Services: Customer service, servicing, restoration, refund, and exchange are examples of service programmers that keep products running smoothly and improve the customer experience.

3.2) Secondary Activities

The purpose of secondary activities is to aid in the efficiency of primary activities. When the efficiency of all the below-mentioned support activities becomes more efficient, it enhances at least one of the five major activities. On a company's revenue statement, these support operations are usually indicated as overhead costs. 

• Procurement: It refers to the process by which a corporation acquires raw materials.
• Technological development: During the research and development (R&D) phase of a company, technological advancement is utilized to create and develop production procedures as well as automate processes. 
• Human resource management (HR): It entails hiring and keeping workers engaged who will help design, promote, and sell the product in accordance with the company's business plan. 
• Infrastructure: Company systems and composition of its management team, like strategy, accountancy, financing, product testing, are examples of infrastructure.

4) Value Chain Components Explained through Example

To understand how a value chain works, let’s consider the example of eCommerce giant, Amazon. As part of its ambition to be the most client-centric corporation, the company follows some of the below-mentioned primary activities:-

4.1) Inbound Logistics

Products supplied through Amazon's own fulfillment services, as well as data center resources that power Amazon Web Services (AWS), are the company's key inputs. Amazon can make use of its size as a major company to cut the cost per unit of items by outsourcing.

4.2) 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. 

4.3) Outbound Logistics

This is the point at which Amazon converts its inputs into outputs. Amazon's fundamental product, its ecommerce marketplace, provides a secure venue for both users and merchants to conduct e-commerce transactions. Their two-day delivery is a significant advantage over competitors.

4.4) Marketing and sales

Amazon spent billions on advertising and marketing in the last decade or so, demonstrating the economic power of a large corporation to preserve its position among the most recognized brands in the world. Amazon is noted for its straightforward and easy return process, including its client satisfaction scores for AWS cloud services.

5) How to Conduct a Value Chain Analysis in Ecommerce

Organizations must conduct a value chain model analysis to determine where improvements can be made to increase brand image and customer value. An analysis that evaluates each and every activity that contributes to the value chain of a firm is known as value chain model analysis.

This helps executives to see how each link in the chain contributes to or detracts from the end product and service. An eCommerce value-chain market analysis, for example, might find methods to make tasks more effective, lowering costs, improving product design, or boosting product distinction. 

Performing a value chain analysis consists of three steps:

Step 1: Determine the activities in the value chain 

This is the initial step which includes learning about the basic and secondary actions 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 to figure out how much each specified activity contributes to the overall value-chain process. It's also crucial to consider the costs associated with each operation, as cutting them could increase the total transaction value. 

Step 3: Look for ways to get a competitive edge

You may assess the value chain via the perspective of whichever competitive advantage you are seeking to create. For instance, a corporation looking to cut costs would examine the eCommerce value chain from the standpoint of lowering costs and enhancing efficiency. Perhaps, 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. 

Final Conclusion

Value chains in eCommerce facilitate the analysis of all operations involved in the production of a product or service, as well as the identification of cost-cutting and differentiation. You can streamline efforts, remove waste, and boost profits by using a value chain.

Further, it aids in getting appropriate insights of inner processes that can improve the end customer's experience. Overall, an eCommerce value chain is used to improve operational efficiencies such that a company may give the most value to its customers for the least amount of capital investment.