Virtual Value Chain

Internet MarketingDr. Mary Wolfinbarger

Value Chain

The series of value-adding activities connecting a company’s supply side (raw materials, inbound logistics and production processes) with its demand side (outbound logistics, marketing and sales).

The process can be mapped via a flow diagram and then “re-engineered” to increase value or reduce costs

Idea developed by Michael Porter to analyze sources of competitive advantage

Fundamental core concept of business strategy

The Value Chain Concept

The chain consists of a series of activities that create and build value.

They culminate in the total value delivered by an organization.

Value Chain Concept

By analyzing stages of a value chain, can redesign internal and external processes to improve efficiency and effectiveness Improve the value of what you do And/or do it cheaper

VirtualVirtual Value Chain

Original VC model treats info only as a supporting element

But info itself can be a source of value Example: FedEx online tracking

DHL now can notify you via email when package is delivered at your home

Example: Amazon recommendations Idea is to look for ways to create value

using info Info includes just about anything you can

digitize

Virtual Value Chain

Rayport and Sviokla suggest businesses operate in two worlds:

A physical world (marketplace) A virtual world (marketspace)

The two spaces are “two interacting value-adding processes”

Virtual Value Chain

Example: A phone answering machine is in the

marketplace (it’s physical) Electronic answering services are in

(virtual) marketspace Most businesses now operate in both

types of spaces –e.g. e-commerce; newspapers

Anything that can be digitized can be done in the “marketspace”

Creating Value in the VVC

“Just as someone takes raw material and refines it into something useful – as in the sequence of tasks involved in assembling an automobile on a production line – so a manager today collects raw information and adds value through these steps.”--Rayport and Sviokla

Three stages of value-adding informational processes

1. Visibility: improve the ability to track physical operations more effectively

2. Mirroring capability: substitute virtual activities for physical ones

3. Create new customer relationships: use info to deliver value to customers in new way

Improving Visibility

Info technology allows managers to “see” or “track” operations more effectively Example: Frito-Lay’s “info revolution”

initiative Managers can visualize the entire chain from

ordering corn to planning local promos

Improving Visibility How does Frito-Lay do it?

Employees in field collect info on sales of products daily and feed it to co.

Field employees collect store info about sales and promo of competing and new products

Frito-Lay continuously optimizes, reducing inventory and supplier risk, planning truck routing

Still – technology and info are playing a support role only when visibility is improved

Mirroring Capability

“When companies move activities from the place to the space, they begin to create a virtual value chain that parallels but improves on the physical value chain.”

-- Rayport and Sviokla

Mirroring Capability

Goes beyond simply using info in a support role

Central issue: How can activities be moved from the marketplace to the marketspace to become faster, better, more flexible, cheaper? Or, how do we digitize what we already

do?

Mirroring Capability

Example: Ford’s “virtual design team” testing of prototypes in simulated

environments with colleagues over a computer network around the world

Suppliers are drawn into the design process

Mirroring Capabilities

“Every manager knows that staying competitive today depends on achieving higher levels of performance for customers while incurring lower costs in R & D and production…On the VVC, companies may find dramatic low-cost approaches to delivering extraordinarily high-value results to customers.”

--Rayport and Sviokla

Mirroring Capabilities Mirroring may move customers from the

“place” to the “space” The question is: what do we do offline that

we can do online (or otherwise digitally)? Example: eCommerce Example: Online customer service Example: Email marketing Example: Online course registration Example: Online surveys

New Customer Relationships

Not just creating values in “the space,” but extracting new value from it

New Customer Relationships

You are at this new level whenever some new functionality is offered or when going digital magnifies mirroring greatly Online maps: Are they simply a “mirror” of offline

maps? Amazon’s recommendation system (built on

collaborative filtering) Package tracking Personalized topic notification systems Brand or product communities through listservs or

blogs (e.g. Prius, Engadget.com) An example of magnifying – customer

communities on steroids

New Customer Relationships

More Examples: Customer as insider (e.g. sitting in on

artist recording sessions or replaying them; watching a video of a commercial being filmed)

Personalized content and product pages (for B2C & B2B)

Affiliate programs (Customer as salesperson) (MOTL)

Your idea here….

Implications

“In the marketspace, many of the business axioms that have guided managers don’t apply.”

--Rayport and Sviokla

Five principles:

1. The Law of Digital Assets Digital assets not used up

when consumed Music, content, entertainment,

pictures…. Can price aggressively

Five principles:

2. New Economies of Scale Personalized services that rely on

info can efficiently be utilized Example: Musicmatch allows users to

customize styles of music or artists on your personalized “radio station”

Zappos notifies you when new styles of a brand are added

Notify when your size comes back in stock

Five principles:

3. New Economies of Scope Can expand scope of

operations by using present customer info

Amazon’s strategy, right?

Five principles:

4. Transaction-Cost Compression The “transaction cost” of collecting

info about customers is lower than ever

(More about transaction costs later) (Dynamic Attitude Analysis – scanning

and collating attitudes about products written all over the web on a daily basis – MOTL)

Five principles:

5. Rebalancing supply and demand Combines previous 4 principles –

focus is shifting from supply-side to demand-side thinking

More opportunities to “sense and respond” to customer desires

Example: Amazon sends email when an author I’ve previously purchased releases a new book – they know I want it before I do!

Sending “sweeteners” to customers who abandon shopping carts

Assignment: (in class)

How does and how could CSULB and/or the Marketing department (or any department on campus) use the Internet in order to

1. Increase visibility of operations (hint: think in terms of moving students through their educations efficiently and effectively)?

2. Mirror activities currently carried on in the marketplace (physical world) in the marketspace (virtual world)?

3. Create new customer (student) relationships?

Brainstorm as many ideas as possible. List them and turn them in.