Review Session 1 Value Chains 1 Introduced by

Review Session 1

Value Chains (1) • Introduced by Michael Porter (1985) • Value Chain – A way of organising activities undertaken by each Strategic Business Unit (SBU) – An SBU is a • • Unit of the company Has a separate mission and objectives That can be planned independently from the other businesses It can be a company division, a product line or even individual brands 2

Value Chains (2) • Each SBU undertakes – Primary Activities • • • Design Production Promotion Marketing Delivery Product/Services Support – Secondary / Supporting Activities • Human Resources Management • Purchasing 3

Industry Value Chains • Value system – Larger stream of activities into which a particular business unit’s value chain is embedded – Also referred to as industry value chain 4

Examining the Value Chain • Each business unit has its own value chain – logger, sawmill, lumberyard, chair factory, retailer, consumer, and recycler – The sawmill purchases logs from the tree harvester and combines them in its manufacturing process with inputs, such as labor and saw blades, from other sources. – Among the sawmill customers are the chair factory and other users of cut lumber • Examining this industry value chain could be useful – for the sawmill that is considering entering the tree harvesting business – the furniture retailer who is thinking about partnering with a trucking line • The industry value chain identifies opportunities up and down the product’s life cycle for increasing the efficiency or quality of the product 5

Value Chain for a SBU 6

Primary Activities (1) • Identify customers – Activities that help the firm find new customers and new ways to serve existing customers • Market research and Customer satisfaction surveys • Design – Activities that take a product from concept to manufacturing • Concept research, Engineering, and Test marketing • Purchase materials and supplies – Procurement activities • Vendor selection, Vendor qualification, Negotiating long-term supply contracts, and Monitoring quality and timeliness of delivery 7

Primary Activities (2) • Manufacture product or create service – Activities that transform materials and labor into finished products • Fabricating, Assembling, Finishing, Testing and Packaging • Market and sell – Activities that give buyers a way to purchase and that provide inducements for them to do so • Advertising, Promoting, Managing salespersons, Pricing, and Identifying and Monitoring sales and Distribution channels • Deliver – Activities that store, distribute, and ship the final product • Warehousing, Handling materials, Consolidating freight, Selecting shippers, and Monitoring timeliness of delivery 8

Primary Activities (3) • Provide after-sale service and support – activities that promote a continuing relationship with the customer • Installing, Testing, Maintaining, Repairing, Fulfilling warranties, and Replacing parts 9

Secondary/Support Activities • Finance and administration – Activities that provide the firm’s basic infrastructure • Accounting, Paying bills, Borrowing funds, Reporting to government regulators, and ensuring Compliance with relevant laws • Human resources – Activities that coordinate the management of employees • Including recruiting, Hiring and Training • Technology development – Activities that help improve the product or service that the firm is selling and that help improve the business processes in every primary activity • Basic research, Applied research and Development, Process improvement studies, and Field tests of maintenance procedures 10

Value Chain in E-Commerce • E-commerce and Internet technologies can be used to – – reduce costs improve product quality reach new customers or suppliers create new ways of selling existing products • Eg – A software developer who releases annual updates to programs might consider removing the software retailer from the distribution channel for software updates by offering to send the updates through the Internet directly to the consumer. – This change would • modify the software developer’s industry value chain • provide an opportunity for increasing sales revenue – (the software developer could retain the margin a retailer would have added to the price of the update) 11

Exercise • What is the Value Chain of a company selling – – Banking Services Books Software Hardware • How was the process in the past? • Perform a SWOT analysis • Plan how you would do the process in the future by applying the SWOT analysis 12

Example Value Chain • Web sites like Amazon. com, Barnes & Noble, Books-A-Million, e. Campus, Internet Bookshop, and Powell’s Books. 1. Author writes book 2. Publishing company manufactures and releases book 3. Publisher partners with Amazon. com to advertise on Amazon’s website 4. Reader / student is asked to find said book 5. Reader / student goes online to Amazon. com to make purchase 6. Reader / student no longer needs book and sells it back to Amazon at used price 13

Web catalog revenue model (1) • Mail order or catalog model – Proven to be successful for a wide variety of consumer items • Web catalog revenue model – Taking the catalog model to the Web • What are the advantages? • What are the disadvantages? 14

Web catalog revenue model (2) • Apple, Dell, Gateway, and Sun Microsystems have had great success selling on the Web • Dell created value by designing its entire business around offering a high degree of configuration flexibility to its customers 15

Web catalog revenue model (3) • Retailers use the Web catalog model to sell books, music, and videos – Among the most visible examples of electronic commerce • Jeff Bezos – Formed Amazon. com • Jason and Matthew Olim – Formed an online music store they called CDnow 16

Luxury Goods • People are still reluctant to buy luxury goods through a Web site • Web sites of Vera Wang and Versace – Constructed to provide information to shoppers, not to generate revenue • Web site of Evian – Designed for a select, affluent group of customers 17

Clothing Retailers • Lands’ End – Pioneered the idea of online Web shopping assistance with its Lands’ End Live feature in 1999 • Personal shopper – Intelligent agent program that learns customer’s preferences and makes suggestions • Virtual model – Graphic image built from customer measurements 18

Flowers and Gifts • 1 -800 -Flowers – Created an online extension to its telephone order business • Chocolatier Godiva – Offers business gift plans on its site 19

Digital Content Revenue Models • Firms that own intellectual property have embraced the Web as a new and highly efficient distribution mechanism • Lexis. com – Provides full-text search of court cases, laws, patent databases, and tax regulations • Pro. Quest – Sells digital copies of published documents 20

Advertising-Supported Revenue Models • Broadcasters provide free programming to an audience along with advertising messages • Success of Web advertising is hampered by – No consensus on how to measure and charge for site visitor views • Stickiness of a Web site: the ability to keep visitors and attract repeat visitors – Very few Web sites have sufficient visitors to interest large advertisers 21

Web Portal Revenue Models (1) • Web portals are so named because the goal is to be every Web surfer’s doorway to the Web • One rough measure of stickiness is how long each user spends at the site • Nielsen//Net. Ratings determine site popularity by measuring the number of unique visitors 22

Web Portal Revenue Models (2) • Web portals – High visitor counts can yield high advertising rates – Companies that run Web portals add sticky features such as chat rooms, e-mail, and calendar functions 23

Stickiness of Popular Web Sites 24

Advertising-Subscription Mixed Revenue Models (1) • Subscribers – Pay a fee and accept some level of advertising – Typically are subjected to much less advertising • Used by – The New York Times and The Wall Street Journal 25

Advertising-Subscription Mixed Revenue Models (2) • Business Week – Offers some free content at its Business Week online site – Requires visitors to buy a subscription to the Business Week print magazine 26

Advertising-Subscription Mixed Revenue Models (3) • Time Warner’s AOL unit – One of the most successful Web portals – Charges a fee to users and has always run advertising on its site • Yahoo! – Now charges for the Internet phone service originally offered at no cost 27

Fee-for-Transaction Revenue Models • Businesses offer services and charge a fee based on the number or size of transactions processed • Disintermediation – Removal of an intermediary from a value chain • Reintermediation – Introduction of a new intermediary 28

Fee-for-Service Revenue Models (1) • Fee based on the value of a service provided • Services range from games and entertainment to financial advice • Online games – Growing number of sites include premium games in their offerings – Site visitors must pay to play these premium games 29

Fee-for-Service Revenue Models (2) • Concerts and films – As more households obtain broadband access to the Internet, companies are providing streaming video of concerts and films to paying subscribers • Professional Services – State laws are one of the main forces preventing U. S. professionals from extending their practices to the Web 30

Revenue Models in Transition • Subscription to advertising-supported model – Microsoft founded its Slate magazine Web site • An upscale news and current events publication • Charged an annual subscription fee after a limited free introductory period • Was unable to draw sufficient number of paid subscribers • Now operated as an advertising-supported site 31

Advertising-Supported to Advertising-Subscription Mixed Model • Salon. com – Operated for several years as an advertisingsupported site – Now offers an optional subscription version of its site – Subscription offering was motivated by the company’s inability to raise additional money from investors 32

Advertising-Supported to Fee-for. Services Model • Xdrive Technologies – Opened its original advertising-supported Web site in 1999 – Offered free disk storage space online to users – After two years, it was unable to pay the costs of providing the service with the advertising revenue generated – Later switched to a subscription-supported model 33

Advertising-Supported to Subscription Model • Northern Light – Founded in August 1997 as a search engine with a twist – Revenue model • Combination of advertising-supported model plus a fee-based information access service – January 2002 • Converted to a new revenue model that was primarily subscription supported 34

Multiple Transitions • Encyclopædia Britannica – Original offerings • The Britannica Internet Guide – Free Web navigation aid • Encyclopædia Britannica Online – Available for a subscription fee or as part of a CD package – 1999 • Converted to a free, advertiser-supported site – 2001 • Returned to a mixed model 35

Revenue Strategy Issues • Channel conflict – Occurs whenever sales activities on a company’s Web site interfere with existing sales outlets – Also called cannibalization • Channel cooperation – Giving customers access to the company’s products through a coordinated presence in all distribution channels 36

Exercise • Choose a revenue model and give examples of 2 businesses which use that model. Describe how they work. • Which of the goods they sell are – Appropriate to sell online and say why – Not appropriate to sell online and say why • Which additional new products do you think they should sell online? 37

Factors effecting performance • Web server hardware – Server computer must have enough memory and disk space • Factors that affect Web server performance – Operating system – Connection speed – User capacity 38

Web Hosting Alternatives • Self-hosting – sharing of company bandwidth with website visitors • Commerce Service Providers (CSPs) – ISPs offering Web Hosting • Ease of Update (FTP, HTTP) • Data redundancy (Mirroring, Backup Servers) 39

Disadvantages of E-Commerce • Some business processes are difficult to be implemented through electronic commerce • Return-on-investment is difficult to apply to electronic commerce • Businesses face cultural and legal obstacles to conducting electronic commerce 40

General Welfare of Society • Electronic commerce benefits the general welfare of society because – Electronic payments of tax refunds and welfare cost less to issue and arrive securely – Electronic payments can be audited easily – Electronic commerce enables people to work from home – Electronic commerce makes products and services available in remote areas 41

Usability Testing (1) • Firms are now starting to perform usability testing to their Web sites • As the usability testing becomes more common, more Web sites will meet their goals • Eastman Kodak, T. Rowe Price, and Maytag have found that a series of Web site test designs help them a lot 42

Usability Testing (2) • Companies that have done usability tests – Conduct focus groups – Watch how different customers navigate through a series of Web site test designs • Cost of usability testing is low compared to the total cost of a Web site design or overhaul 43

Review Questions … • What business are suited for – E-Commerce? – Combination of traditional + E-Commerce? – Traditional Commerce Only? 44

Amazon. com Case Study • What are the benefits and limitations of Amazon's online retail model? • How does Amazon. com change the market for books? • Amazon has a huge catalog of products for sale. How does the design of Amazon's web site facilitate the user's effort to locate a particular product? • What is collaborative filtering? How does Amazon use this technique to encourage sales? • Amazon lets its customers sell used books along side the new versions. Is this a reasonable business practice, of does it unfairly undermine the market for new books? 45