The Value Chain

Typically, when we think of a company, we think of the product or service that the company sells. With a company like Dell, we think of the computers the company sells. In order for Dell to sell computers, the company has to do a lot of other things right if it wants to stay in business. These steps are called the value chain, or the activities that a company engages in that add value to its products or services.

These steps are critically important to business success, but companies must weight the costs and benefits to determine the most efficient way to allocate resources to various aspects of the value chain to maximize sales and profit.

Research and Development

Research and development is the process of coming up with new products or improving existing products. Today’s consumers demand continuous improvement and new products, which is why companies spend a lot of resources on research and development. When was the last time you purchased a cell phone and thought, “I’ll just get the same model I got last time.”

You want the newest, latest model. Cell phone manufacturers know this and are releasing new models regularly, especially since technology advances so quickly. If a cell phone company doesn’t adapt to the changing demands of customers, sales will suffer.

Missed adaption in Research and Development

Blackberry was a significant player in the smartphone market early in the game, but Research in Motion (the company that makes Blackberry) failed to adapt to changing market conditions. In the first quarter of 2008, Research in Motion held the largest share of the smartphone market with 44%. By the third quarter of 2014, Research in motion held just 1.5% of the smartphone market.

Blackberry has not adapted to changing demands for larger screens, and on-screen keyboards like other cell phone makers and its sales are suffering because of it.

Design

Design includes detailed plans for products and how those products will be produced in sufficient quantities and in ways that are acceptable to society. This is the step where the engineering takes place. If research and development are how to create the product, the design is how to build the product.

The design looks at how all the R&D will come together into a product that consumers want to buy. Many in the technology community were skeptical of larger cell phones. Many believed that the design was just too big for the average person, yet we are seeing larger cell phones like the Samsung Note and iPhone 6 plus sell well with consumers.

As part of the design process, companies must also look at the manufacturing process and consider how a product will be manufactured. Will the company use people to assemble the product or machines? Will the company build a green manufacturing plant? How can manufacturing facilities be designed to make it easier to transition from making one product to another?

Production and Purchasing

In this step of the value chain, the company allocates resources to making or purchasing its product. For a manufacturing company, the company must purchase materials, pay for labor, and pay for the costs to run the facilities used in the production process.

  • Which materials should be used and from where should they be purchased?
  • How many employees do we need and how should their labor be allocated?
  • What additional resources will be needed to meet production demands?

For a merchandising company, this is where the company purchases inventory and makes decisions about quantities needed to keep up with demand. Companies must determine what should be purchased, which brands should be carried, and the timing of purchases. The last thing a merchandising company wants is for customers to see a product online or in an ad and then not be able to buy it in stores.

Customers live in an Amazon Prime world where you can get almost anything with two-day shipping. If a retailer is out of stock and it will take weeks for the product to come in, the customer will get the product somewhere else.

Marketing

This is the stage where it’s time to spread the word about our product and convince customers that they can’t live without it. All marketing avenues cost resources. Getting celebrities to endorse a product is expensive. Placing ads on television and in print media is expensive.

Even social media venues like Facebook and Twitter require people to develop content, engage followers, and monitor the account for complaints about the company. Companies must determine how to get the most bang for the buck when it comes to marketing efforts.

Marketing in action with the Nintendo Wii

Nintendo did an excellent job with marketing when the Nintendo Wii was first launched in 2006. Ads with the tagline “Wii want to play” showed kids getting off the couch playing virtual tennis with a grandpa. The system revolutionized the way people play video games and showed that the entire family could play together. Marketing opened up whole new markets for Nintendo.

Companies were buying them to use at trade shows. Nursing homes were buying them to keep seniors active. All this demand started with marketing.

Distribution

Distribution is the process by which the company gets its product to customers. Dell distributes its computers directly to customers through its website and also through retailers like Best Buy and Costco. Amazon distributes its products through third-party delivery companies but is currently exploring other options like same-day delivery in major markets, stores in large cities, and even drones.

Companies must examine the cost of these distribution channels to determine which is most cost-effective while delivering an experience that meets or exceeds customer expectations.

Distribution is not just physical delivery but also the mechanisms used to sell the product. Before the internet, many companies used catalogs as a way to let customers know about products with mail-in forms for ordering.

Then shopping channels and infomercials on television allowed us to see the product before calling in to order it. Some companies used door-to-door salespeople to sell their products. Others use in-home parties to demonstrate and sell products. There are lots of ways to get products into the hands of customers. Companies must determine what is the best way to showcase and sell their products.

Customer Service

Customer service is the last step in the value chain, but it could be argued that is the most important step for many companies. Customer service is the support provided to customers after the sale. This includes everything from technical support to handling customer inquiries and complaints.

In the age of social media, customer service is incredibly important because now an unhappy customer can potentially voice their unhappiness to millions of people all over the world.

Companies must determine what type of warranties to provide for their products, training opportunities, and ways customers can contact the company. All of these items cost the company money, but that must be balanced with potential losses from decreased sales if unhappy customers tell their friends and followers about their bad experiences.

Final thoughts

Companies must balance the costs and benefits of each stage of the value chain. A great marketing campaign can generate buzz and demand for a product, but if the company cannot deliver the product because of production or distribution issues, the company will not stay in business very long.

Excellent customer service after the sale won’t matter if the design of the product doesn’t appeal to consumers and therefore no one buys it. Balance must be achieved among the steps of the value chain to be successful.

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