Work: Porter's Value Chain Framework
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Using Porter's value chain framework, explain how technology can help an organisation to gain a competitive advantage
Introduction
The discussion will focus on private sector businesses and their search for competitive advantage (Dennis et. al. 1991). Information technology has led to “lower labour costs by reducing the need for certain production and clerical staff” (Thompson 1993:418). It has also improved competitive advantage through enhanced marketing methods. For example, service industries have benefitted by being able to provide enhanced offers. These have helped to “optimise revenue” (Johnson et. al. 1999:167). Companies have been able to improve their analysis of “company and industry databases” (Thompson 1993:422). This has helped them to identify and satisfy various consumer markets better (Thompson 1993). Differentiation of products or services has improved with the ability to appeal to a broad group of segments; or to target niche markets more effectively (Thompson 1993). Technology has led to the re-design of services with the ability to sell more directly using the internet. Information and communications technology is a source of “many new services (which were) previously impractical” such as internet-led home shopping (Johnson et. al. 1999:161). Computer based systems have been exploited in many organisations and have transformed customer experience. In particular, “travel bookings and hotel reservations systems” are examples of services which have been radically transformed by technology (Johnson et. al. 1999:172).
Technology and the Value Chain
A description of value chain processes is provided in the appendix. These include primary value chain activities and the support activities. Technology has improved the value chain, with linkages between different parts of the chain becoming more efficient. For example, it has meant that communication is much more effective so goods and services can be delivered more easily. The main discussion will examine three groups of examples. Firstly, the car industry is a traditional context for explaining how value chain analysis can improve competitive advantage. Secondly, recent technological examples related to Amazon and Apple will be discussed. Thirdly, the value chain in the context of the food and clothing industries will be examined.
This essay is concerned with how technological activities, within the value chain, can be used to improve product and processes (Stabell and Fjeldstad 1998). In terms of car manufacturing, the argument is concerned with how technology has improved products. In terms of the food industry, the discussion highlights improvements made to processes so that consumers are more aware of the source of their food; as this is a source of competitive advantage too.
In terms of competitive advantage, businesses need to determine how they can use individual parts of the organisation’s value chain and combine the parts so that they can “add value to the customer” (McKeown 2012:179). The ability of a company to compete successfully is a combination of everything the company does and the way everything is organised (McKeown 2012). The value chain is a useful method of examining the organisational relationships with all the suppliers (McKeown 2012). Improvements to businesses emerge not just from “cost controls” but come from examining how work is undertaken throughout the value chain (Rumelt 2012:170). For example, e-bay was arguably better able to satisfy customers through the acquisition of Pay Pal’s technology and its “payment systems skills” (Rumelt 2012:171). It could further develop its competitive advantage by integrating its website into mobile phone payment systems (Rumelt 2012).
Car Manufacturing
Value Chain analysis has traditionally been applied to manufacturing businesses where the quality, availability and the price of supplies determines the final product. Technology can improve all of these factors and so has become an important factor which can help “determine firm performance” (Rothaermel2008:222). In the 1980’s, Porter recognised the importance of information technology for delivering competitive advantage. He argued that it increased “the power of buyers in industries assembling purchased components”. It was easier for buyers, such as in the car industry, “to evaluate sources of materials” (Porter and Millar 1985:155). This was presumably because motor manufactures were able to assess suppliers. They had information readily available about them and their products on computer databases.
A clear example of the use of technology, in the value chain, is to lower costs through minimising suppliers’ inventory levels. Such a process could lower prices and so deliver greater value to customers. This would provide a car manufacturer, such as Nissan, with competitive advantage. There has been investment in so-called ‘just-in-time systems’. Japanese car manufacturers have managed value chains to provide ‘just in time’ “deliveries of parts which can be put to immediate use rather than being tied up in expensive and unproductive inventory” (Henry 2008:112). A car producer could also invest in technology so that the quality of its materials is improved. This should help reduce the maintenance costs of a car when it is being used (Henry 2008:109). Again, this is a way of satisfying the final consumer and so gaining competitive advantage. In other manufacturing industries similar processes are at work. British Airways (BA) or IAG has constructed working relationships with its suppliers, such as the airline manufacturer Boeing. BA has attempted to decrease costs while also improving the quality of aircraft too (British Airways 2012). The correct usage of technology can also lead to competitive advantage in recently emerging service industries. The next section will examine Amazon.
Amazon and Technology
When Amazon was established it reconfigured a value chain for selling books and other items. It chose to sell books via the internet rather than through stores. It has used operational efficiency, in terms of efficient ordering, warehousing and delivery, to develop the Amazon Prime business (Financial Trading System 2011). The opportunity to use the internet as a retail method has also allowed Amazon to diversify into other areas. In comparison with eBay, it has allowed individuals to sell through the website and this provided significantly greater choice. This has also allowed Amazon to transfer the transport costs onto the individual seller. This has enabled Amazon to develop market leadership as an intermediary which facilitates transactions between buyers and sellers. Technology has contributed to this leadership as they have provided a website with “easy-to-use functionality” (Financial Trading System 2011).
The ability to download music through Amazon has helped to remove costs from the value chain. This re-configuration of the value chain has meant “deleting activities altogether” (Johnson et. al. 1999:173). This is because there is less need for the physical transport of compact discs or DVD’s or actual music shops themselves. New entrants, such as Amazon, have achieved entry into the market this way. This is because, arguably, incumbent organisations, such as HMV, have taken for granted that the value chain has to be configured in a particular traditional way (Johnson et. al. 1999). Amazon’s competitive advantage has been gained through lower prices to the consumer. Technology has also offered a new product to consumers in terms of downloadable music. New innovations have also been exploited by Apple. This will be discussed next.
Apple Corporation and Technology
Apple has also reconfigured computing value chains. For example, it has built strong collaborative interrelationships between its own products (Gamble and Marino 2011). Users of mobile technology, such as the Apple iPhone, have been able to access the internet using the “Apple Safari Web browser” (Gamble and Marino 2011:361). Gamble and Marino suggest that Apple’s recent success can be attributed to the corporation being able to manage the “the company’s supply chain” (Gamble and Marino 2011:350). It has negotiated well with microchip manufacturers who supply it with premium quality microchips. These are vital for the performance of its handheld devices. The next sections will examine the food and clothing industries.
Morrisons and the Supermarket Value Chain
The usefulness of the value chain model is that it emphasises the importance of business relationships. The supply chain is not separate from the company. Rather there is an interdependence which helps generate value (Henry 2008). A supermarket needs to consider how “value is created within the supply chain system” (Henry 2008:103-4). For example, a farmer will supply value to a food manufacturer who will in turn supply a supermarket. The supermarket needs to create value from its working relationships with its suppliers. One way of achieving this is to control say the abattoirs. Supermarkets can use computer technology to follow meat along its route along the supply chain. They can use technology to demonstrate the traceability of foodstuffs to the consumer. Morrisons has achieved competitive advantage through traceability. Perhaps, it has learnt from car manufactures about the need to oversee the supply chain to guarantee quality. They have taken responsibility for their supplies. Other supermarkets perhaps have suffered as they have sought to blame external suppliers “rather than consider themselves to be responsible” (Seddon 2013).
The recent example of horsemeat contamination in beef-related products shows that the source or provenance of food can be of vital importance to consumers. The ability to show traceability could be described as a ‘core competence’. A company, such as Morrisons, has developed competitive advantage by keeping such core competencies ‘in house’ rather than sub-contracting them out (Henry 2008:113). Morrisions have invested in manufacturing facilities so that they can identify the sources of their meats on their computer systems. Morrisons claim to have “unique manufacturing and packing facilities” (Morrison’s 2011:5). They are using technology to “really understand how the food that we sell has been produced” (Morrison’s 2011:5). They intend to broaden their own manufacturing facilities. They can then emphasise to consumers that they have better control over their sources of food than their competitors (Morrison’s 2011). Morrisons has invested in technology and backward integration so that they are in control over their food production facilities. Therefore they are in a position to determine the quality of the foods which they sell in their supermarkets.
Primark and the Clothing Supply Chain
This section will examine how technology could be used in the global business environment to monitor garments in the clothing supply chain. A company, such as Primark, needs to monitor its clothing supply chains so that there are not abuses taking place. Such abuses could erode consumer confidence which could cost Primark competitive advantage. Primark is dependent upon clothing manufacturers, such as in Bangladesh or China, to provide cheap garments. Therefore it needs inspection to examine clothing factories in these countries. However, technology could be used to make sure that the clothing meets regulatory labour standards. Surveillance technology, to oversee clothing suppliers, could be used to lessen criticism of Primark. It needs to reduce the criticism of selling ‘value clothing’ from its suppliers. It wants to avoid the accusation that it is exploiting “low wages in developing countries” (Wetherly et. al.2011:221). Primark needs to be able to refute possible allegations over inadequate employment practices amongst clothing suppliers (Palmer et. al. 2006). There is “no definite consensus on what is right or wrong behaviour” (Worthington et. al. 2009:212). However, Primark still needs to use the technology available to it to deflect potential consumer criticism.
Conclusion
Technology can be used to help deal with criticisms over problems over food safety or traceability. It could also be used to deal with problems in the clothing supply chain and help deal with criticisms of poor quality labour clothing standards. Technology can be used for competitive advantage. Such an analysis would show that certain sectors are “vulnerable to substitution” (Johnson et. al. 2011:99). In the music industry, an Amazon or Apple iTunes model of downloads appears to be the only realistic method of achieving competitive advantage in the mass market. This is because it is the quickest way to deliver music to the customer and the most flexible in terms of transferring music between different portable devices.
Finally, the “value chain (often) starts with the value-creating processes of suppliers, who provide the basic raw materials and components. It continues with the value-creating processes of different classes of buyers or end-use consumers". This is the traditional manufacturing model such as in the car industry. However, there is a final point: “the disposal and recycling of materials” (Institute of Management Accountants 1996). Competitive advantage may increasingly depend upon the ability of companies to manage the recycling or disposal of products in an environmentally acceptable manner. This is the case if consumers demand such environmental compliance.
References
Dennis, A., Nunamaker, J. Jr., Paranka, D. (1991), Supporting the Search for Competitive Advantage, Journal of Management Information Systems, Vol. 8, No. 1 (Summer, 1991), pp. 5-36
Financial Trading System, (2011), The Value Chain and Amazon.com
Gamble, J. and Marino, l. (2011), Apple Inc, In 2011: Can it Prosper without Steve Jobs
Henry, A., (2008), Understanding Strategic Management, Oxford University Press, Oxford
Institute of Management Accountants, (1996), Value Chain Analysis for Assessing Competitive Advantage
Johnson, G. and Scholes K. (1999), Exploring Corporate Strategy: Text and Cases, Fifth Edition, Prentice Hall, London
Johnson, G. Whittington, R. and Scholes K. (2011), Exploring Strategy: Text and Cases, Ninth Edition, Harlow, Pearson Education
McKeown, M., (2012), The Strategy Book, FT Publishing, Harlow
Morrisons, (2011), Annual Report and Financial Statements
Palmer, A. and Hartley, B. (2006), The Business Environment: Fifth Edition, Maidenhead: McGraw Hill Education
Porter, M. and Millar, V. (1985), How information gives competitive advantage, Harvard Business Review, July – August 1985
Rothaermel, F., (2008), Competitive Advantage in Technology Intensive Industries, Chapter 7, Technological Innovation: Generating Economic Results, Advances in the Study of Entrepreneurship, Innovation and Economic Growth, Volume 18, p. 201–225
Rumelt, R. (2012), Good Strategy Bad Strategy, Profile Books, London
Seddon, J. (2013), Horsemeat Scandal: the lesson from a Japanese car manufacturer
Stabell, C. and Fjeldstad, O. (1998), Configuring Value For Competitive Advantage: On Chains, Shops and Networks, Strategic Management Journal, Vol. 19, p. 413–437
Thompson J., (1993), Strategic Awareness and Change, Second Edition, Chapman and Hall, London
Wetherly, P. and Otter, D. (2011) The Business Environment: themes and issues, 2nd edition, Oxford: Oxford University Press
Worthington, I. and Britton, C., (2009), The Business Environment, Sixth Edition, Harlow: Pearson Education
Appendix: Porter’s Value Chain
Primary Value Chain Activities:
Inbound Logistics, Operations and Outbound Logistics, Marketing and Sales, Service
Support Activities:
Firm Infrastructure, Human Resource Management, Procurement, Technological Development - Johnson and Scholes (1999)