If you're an eCommerce business owner, you might have heard of the term "value chain" before. But what does it mean, and why should you care? In this article, we'll explain what a value chain is, how it works, and how it can help you create more value for your customers and your business.
A brief history of Value Chain
A value chain is a way of looking at all the activities and processes involved in creating and delivering a product or service to your customers. It was first introduced by Michael Porter, a famous Harvard professor and business guru, in his book “The Competitive Advantage: Creating and Sustaining Superior Performance”. Porter argued that competitive advantage comes from performing these activities better than your competitors.
A value chain consists of two types of activities: primary and secondary. Primary activities are those that directly contribute to the creation and delivery of your product or service, such as:
- Inbound logistics: This includes receiving, storing, and managing the raw materials and components that you need to make your products.
- Operations: This includes transforming the raw materials and components into finished products.
- Outbound logistics: This includes packaging, sorting, and shipping your products to your customers.
- Marketing and sales: This includes promoting, advertising, and selling your products to your customers.
- After-sales service: This includes providing support, warranty, repair, and customer service to your customers after they buy your products.
Secondary activities are those that support the primary activities and make them more efficient and effective, such as:
- Procurement: This includes sourcing and purchasing the raw materials, components, equipment, and services that you need for your primary activities.
- Technological development: This includes researching and developing new products, designs, processes, and systems that can improve your primary activities.
- Human resources management: This includes recruiting, hiring, training, developing, retaining, and compensating your employees who perform the primary and secondary activities.
- Infrastructure: This includes managing the overhead and administration of your business, such as finance, accounting, planning, legal, etc.
What can you get from understanding your value chain?
By analyzing your value chain, you can identify where you can create more value for your customers and where you can reduce costs or improve efficiency. For example, you can:
- Improve your inbound logistics by finding cheaper or better quality suppliers or by optimizing your inventory management.
- Improve your operations by adopting lean manufacturing techniques or by automating some processes.
- Improve your outbound logistics by finding faster or cheaper delivery methods or by offering more options to your customers.
- Improve your marketing and sales by segmenting your market or by using digital marketing tools.
- Improve your after-sales service by offering more guarantees or by providing online support.
Of course, these are just some examples of how you can improve your value chain. The possibilities are endless! But wait, there's more! A value chain is not only useful for analyzing your own business. You can also use it to analyze your competitors' businesses and find out where they have strengths or weaknesses. By doing so, you can:
- Benchmark your performance against theirs and see where you can improve or where you have an edge.
- Identify opportunities for differentiation or innovation that can give you a competitive advantage.
- Identify threats or challenges that can affect your market position or profitability.
Let’s see how it works for the giants too…
Now that you know what a value chain is and how it works, let's look at some real-life examples of eCommerce businesses that have used it to create value for their customers and themselves.
Example 1: Amazon
Amazon is probably the most well-known and successful eCommerce company in the world. It has a huge and diverse product catalog, millions of loyal customers, and a global presence. But how does it manage its logistics value chain? One word: innovation. Amazon is constantly investing in new technologies and strategies to optimize its logistics operations. Some of its innovations include:
- Fulfillment by Amazon (FBA): This is a service that allows third-party sellers to store their products in Amazon's warehouses and let Amazon handle the packing, shipping, and customer service. This way, sellers can focus on their core business and benefit from Amazon's logistics expertise and scale.
- Amazon Prime: This is a membership program that offers customers free two-day shipping on millions of items, as well as other perks like video streaming, music streaming, and access to exclusive deals. This program increases customer loyalty and retention, as well as encourages more frequent and higher-value purchases.
- Amazon Logistics: This is Amazon's own delivery network that consists of thousands of drivers, vans, trucks, planes, drones, and robots. This network gives Amazon more control over its delivery speed, quality, and cost, as well as enables it to offer same-day and next-day delivery options to customers.
Example 2: Alibaba
Alibaba is the largest eCommerce company in China and one of the biggest in the world. It operates several online platforms that connect buyers and sellers across different industries and markets. But how does it manage its logistics value chain? One word: collaboration. Alibaba recognizes that it cannot do everything by itself, so it leverages its ecosystem of partners to create a seamless and integrated logistics network. Some of its collaborations include:
- Cainiao Network: This is a logistics platform that connects merchants, warehouses, carriers, and consumers in China and abroad. It uses big data and artificial intelligence to optimize routing, inventory management, and delivery performance. It also offers smart lockers, self-pickup stations, and facial recognition technology to enhance customer convenience and security.
- Alibaba Cloud: This is a cloud computing service that provides infrastructure, software, and data solutions to businesses of all sizes and industries. It helps Alibaba and its partners to improve their operational efficiency, scalability, and innovation capabilities.
- Ant Group: This is a financial technology company that offers digital payment, lending, insurance, wealth management, and credit scoring services to consumers and businesses. It helps Alibaba and its partners to facilitate transactions, reduce risks, and increase customer satisfaction.
Example 3: Shopify
Shopify is a leading eCommerce platform that enables anyone to create an online store and sell their products. It has over one million merchants worldwide who sell everything from clothing to furniture to art. But how does it manage its logistics value chain? One word: empowerment. Shopify empowers its merchants to customize their logistics operations according to their needs and preferences. Some of its features include:
- Shopify Fulfillment Network (SFN): This is a network of fulfillment centers that Shopify partners with to offer fast and reliable shipping to merchants who want to outsource their logistics operations. Merchants can choose which products they want to store in SFN warehouses and which shipping options they want to offer to their customers.
- Shopify Shipping: This is a service that allows merchants to buy discounted shipping labels from major carriers like UPS, USPS, DHL, and Canada Post directly from their Shopify dashboard. Merchants can also track their shipments and manage their returns easily.
- Shopify Apps: These are third-party applications that merchants can install on their Shopify stores to enhance their functionality and performance. There are hundreds of apps available that cover various aspects of logistics such as inventory management, order fulfillment, dropshipping, delivery tracking, customer service, etc.
As you can see from these examples, there is no one-size-fits-all solution for managing a logistics value chain in eCommerce. Each company has its own strengths, weaknesses, opportunities, and threats that shape its logistics strategy and execution.
By optimizing your value chain, you can reduce costs, improve quality, increase efficiency, and enhance customer satisfaction. You can also gain a competitive edge over your rivals who may not be paying attention to their value chain. In other words, value chain is the key to eCommerce success.
So, what are you waiting for? Start analyzing your value chain today and see how you can make it better. Remember, every step counts. Whether it's sourcing from reliable suppliers, choosing the best logistics partners, or offering fast and convenient delivery options, you can make a difference in your value chain. And your customers will thank you for it.