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
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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
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Value Chains (2)
• Each SBU undertakes
– Primary Activities
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Design
Production
Promotion
Marketing
Delivery
Product/Services Support
– Secondary / Supporting Activities
• Human Resources Management
• Purchasing
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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
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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
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Value Chain for a SBU
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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
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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
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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
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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
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Value Chain in E-Commerce
• E-commerce and Internet technologies can be used to
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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)
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Exercise
• What is the Value Chain of a company selling
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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
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Example Value Chain
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Web sites like Amazon.com, Barnes & Noble,
Books-A-Million, eCampus, 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
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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?
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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
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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
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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
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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
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Flowers and Gifts
• 1-800-Flowers
– Created an online extension to its telephone order
business
• Chocolatier Godiva
– Offers business gift plans on its site
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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
• ProQuest
– Sells digital copies of published documents
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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
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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//NetRatings determine site popularity
by measuring the number of unique visitors
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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
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Stickiness of Popular Web Sites
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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
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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
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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
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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
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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
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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
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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
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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
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Advertising-Supported to Fee-forServices 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
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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
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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
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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
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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?
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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
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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)
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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
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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
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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
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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
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Review Questions …
• What business are suited for
– E-Commerce?
– Combination of traditional + E-Commerce?
– Traditional Commerce Only?
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Amazon.com Case Study
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What are the benefits and limitations of Amazon's online retail
model?
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How does Amazon.com change the market for books?
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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?
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What is collaborative filtering? How does Amazon use this
technique to encourage sales?
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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?
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