• Introduction

• Overview of value chain analysis

• Organisational value chains

• Exploiting organisational value chain analysis

• Value chain analysis and channels to market

• Analysis across entire value chains

• Distribution chain analysis

• Multiple channels to market

• Competitor analysis

• Wrapping up

• Notes
  
   

Introduction

Value chain and distribution model analyses have been a mainstay of strategic analytical methods for years. The following notes draw on over 10 years of strategic assignments and show, via examples, the extremely valuable insights that can be gained by using such tools.

Hopefully the reader will find these notes and examples a useful guide as to how they might exploit such tools themselves. As explained in, ‘wrapping-up’, however, although extensive, the ground covered here represents only a tiny proportion of both the underlying theory and practical insight gained from 'learning by doing'.  
 
 
 

Overview of Value Chain Analysis

The value chain represents the chain of value-adding activities that occur between the ultimate suppliers and consumers of products and services. 
 

 
Here are a simple and a slightly more realistic value chain

 
 

Analysis of value chains can therefore exist at several levels:

• At the organisational level or below
• At the level of relationships between two or more players within an overall value chain
• At an overview level, looking at an entire value chain, or a more abstract, ‘value cloud.’

Analysis at these various levels can be applied to:

• Bench-marking performance against competitors or similar value chains
• Identifying bottlenecks in internal or inter-organisational value chains
• Identifying other opportunities to enhance, value, margin or competitiveness

 
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Organisational value chains

Value chain analysis can be viewed in one of two ways. Firstly there is the in-depth approach, which applies the concept as a component of a far wider strategic analysis, drawing upon the work of Michael Porter[1]. Then there is a looser approach that ‘borrows’ some of Porter’s original concepts to create a simplified analytical framework to help determine how businesses add value to their customers. What follows is the looser approach.

The original concept was presented by depicting a similar framework to that below to map a business’s inter-related value-generating activities.

This example application is for a satellite communications firm that leases airtime from satellite operators so that it can sell various services, such as TV relay for broadcasters and ship-to-shore Internet connections and telephone calls. 
 
 

 
In this example, the wider business context within which such services are consumed also needs to be understood. Satellite Network Operators (SNO) belonging to major telecommunications companies enjoy the advantage on an in-house, ready-made, ground-based telecommunications infrastructure.  Large, dedicated SNO’s enjoy economies of scale and are able to bulk-purchase airtime contracts from satellite (space-segment) suppliers at a discount.

To compete, smaller SNOs have to find a way of carving out defensible niche services. The above model illustrates how, for example, a small Japanese SNO could apply its inherent linguistic capabilities and local cultural knowledge, so as to gain competitive advantage over larger US or European operators in its home market. This is because local customer and language knowledge are an essential element of Outbound Logistics, Marketing and Sales, and Service.

Organisational level value chain analysis can be used to benchmark performance of different parts of the organisation, in conjunction with management accounts or other key drivers underpinning business success. It can also help map target versus actual performance across the business, or issues relating to competitive strengths and weaknesses.

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Adaptations of the original value chain framework can be used to determine the potential of individual channel players to enjoy scope or scale economies, or to benefit from various linkages within the chain. The following greatly simplifies the original analytical framework, but is more suited to the quality of information that companies can readily amass about their environment, so as to aid speedy analysis and decision making
 
 

 
 
Using such as model as a base, it is possible to explore how, through various linkages, elements within the chain[2] may be able to exercise more control over, or offer more value to the wider channel of activities serving their ultimate end-customers.  Example linkages include:

• Financial management

• Leasing & finance for infrastructure 

• Centralised treasury management and currency hedging

• Human Resource Management

• Product Training

• Customer Management Training

• Information Management

• Statistical data on operations and marketing

• Benchmarking services

• Exploiting tangible and Intangible Assets

• Using geopolitical knowledge and networks to sell other services

• Offering an outsourced billing service

• Leveraging Core Competences

• Managing parts of other businesses’ infrastructure

• Offering training packages 

• Optimising Business Processes

• Reducing Costs

• Improving Responsiveness

• Realising Customer Value

• Centralised Market Research & Product Development

• Added Value Services via the Internet
  

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The value chain can be used as the basis for many different ways of analysing channels to market and to help determine how competitive strategies involving differentiation, focus and price might be best employed.

A business’s value chain operates within a wider overall market supply-chain. Note however that the term, ‘supply chain’, can be intuitively difficult. This is because most real world examples of supply might more accurately be described as ‘supply webs’. This, in turn, is because they generally comprise multiple suppliers competing with each other in different configurations, from ultimate suppliers to ultimate consumers. It is simply to keep things easy that the analytical concept of a value chain is used, and this can be presented as follows. 
 
 

 
One application of this type of value chain analysis is exploring how different combinations of potential channel players can best exploit their competences, through cooperation down the supply chain, to better serve the end market. Suppliers, for example, can offer added value to customers through product or service differentiation with linkages, which augment the core product or service. An example of how mobile phone operators can augment their services through supply chain cooperation, so as to enhance their offering, is illustrated below:
 
 
 

 
 
In the above scenario, the network operator will gain business if users perceive that the added value of receiving such information, more than justifies the increase in the overall costs of the augmented service package.
 
 
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Analysis across entire value chains

Such analysis is relevant to a variety of high-level decisions, including public policy, pricing[3] and the study of competing or substitute product or services suppliers into the same markets.  At this level of analysis, value chain analysis can be seen as similar to supply chain and distribution channel analysis and it can be useful to clarify the jargon.

When such an analysis of the UK construction industry was conducted on behalf of the government [4] back in the 1990's, the headline findings were:

Major players in the UK construction industry value chain comprised: Suppliers > Contractors > Consultants > Clients, and the major issues in the chain at each level were:

Re. Suppliers

• Low power base
• Fragmented
• Suffer from over capacity

Re. Contractors

• Highly competitive
• Few large players
• Many small players
• Seek to influence project definition

Re. Consultants

• Play critical role in shaping contracts
• Fragmented
• Emergence of professional project managers

Re. Clients

• Major clients increasingly demanding
• Smaller clients typically inexperienced

Basic industry-wide value chain analysis helped identify important findings about an industry which was previously widely regarded as too complicated to properly understand. These and other findings have since informed government policy to encourage the UK construction industry to deliver greater value for the benefit of the wider economy.

 
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Distribution chain analysis  

This section is covered by looking at a few real world distribution chains. We start with an overview of the key value chains that the Satellite Services Provider, explored earlier, has to work with, below:
 
  

 
This above model shows how the satellite services provider has to work with many other players beyond those simply associated with channelling air-time to end-users. 

Satellite communications require access to far more specialised equipment and services than land-based mobile telecommunications. The satellite services provider has to work hard to motivate many other players in parallel markets associated with applications, equipment and systems integration. These players have to find a way of working together to put together the end-user service packages that will, in turn, justify expensive equipment purchases and the consumption of relatively expensive satellite airtime.

The generic distribution model for ordinary land-based mobile telephony is shown below. Because the technology is being used by millions rather than thousands of users, there is no need for the network operators to commission completely bespoke products and applications and instead they are free to strike deals with any of the many products and service providers that sit in the growing 'value cloud' between their mobile network infrastructures and end-users.

Some quite successful network operators have even emerged from the value cloud between the traditional mobile network owners (Such as Vodafone, O2, Orange, T Mobile, 3, etc.) and end-users, by leasing surplus airtime from these networks, to become what are known as 'Mobile Virtual Network Operators' (MVNOs). The most famous of these MVNO 'channel innovators' is Virgin Mobile.  MVNOs can potentially be completely virtual, outsourcing everything, from air-time provision, through billing to marketing, simply adding value by 're-packaging' various offers already being made elsewhere within the 'value cloud'. 

A generic distribution-chain for a mobile phone operator

 
 
The following diagram shows a generic model for the distribution of PCs, and the erosion of Distributor and Dealer positions. The distributor and dealer positions are being eroded as more manufacturers attempt to emulate Dell, with its innovation of direct distribution to end-users, by making use of new sales order processing and logistics technology and recouping margin that would otherwise be lost to the channel:
 
 

 
 
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Multiple channels to market

Many businesses deliver a similar type of service to multiple different target markets, each of which may require a different marketing mix.

This following example of a multi-channel model is taken from the pre-launch publication of what was, at the time, promising to become a major global satellite company[5].

 
 
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Competitor analysis

This last distribution model was used to explore our example satellite network operator’s competitors and provides an alternative view of the channel to market, as compared to the model above (dist chain anlys):
 
 

Using the above model helped us explore and compile competitor data on amounts of revenue and margin allocated to different parts of the channel and also to identify, for each competitor configuration, likely contractual arrangements regarding different elements of their overall service packages. A functional responsibility table for one such competitor was produced as follows:

Although compiling such data can be fraught with difficulty, as much is either secret or out of the public domain, competitor intelligence can be extremely valuable. Having a good value chain model at hand in which to feed available date can therefore be extremely useful in helping to extrapolate and interpolate other data that is not directly available.

With such information for example, a new entrant into the market, could seek to take control of a competitor’s channels to that market, through picking off particular players within it, by offering them superior contract terms. In so doing, not only will they open up their own channel access, but they will also destabilise their competitors.

Using such analysis to explore the allocation of tasks and risks can also be extremely useful both for benchmarking the relative performance of various channel players and for identifying optimal revenue-splits and bonus terms.

 
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Wrapping Up  

These notes cover a lot of practical ground with respect to value chain and distribution model analysis, but only scratch the surface of the theory attaching to these concepts.

Hopefully, you will have discerned from the examples explored that there is a great deal of valuable business insight to gain from such analysis in various settings.

When applying such analysis, however, beware of ‘definitional minefields’. What you might refer to as 'Term X', is more than likely referred to by others as 'Term A', 'Term W' or 'Term Z'. One very bad aspect of this type of work is that it is awash with local jargon. 

It is very difficult to be rigorous in the application of specific terms when conducting such analysis across different market settings. Take for example the last model explored: there were references to Network Providers; Wholesalers; Service Providers and Retailers. All of these terms could have meant the same thing, were it not for the clarification of responsibilities allocated between them in the accompanying table.

Ensure your target audience properly understands all potentially confusing terms or jargon used in such analysis and, where relevant, set up a 'gold standard' sourcebook' for all potentially confusing terms, plus associated data.

Given that competitor data can be very hard to locate with any accuracy, most practical applications of such analysis occur when it is applied as a loose analytical framework, alongside other analytical methods, such as those discussed elsewhere on this website. 

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Notes - with hyperlinks back to references, above

[1] Value Chain analysis is explored in-depth in Michael E Porter’s (1985) ‘Competitive Advantage’ (Free Press ISBN 0-02-925090-0) which follows on from his earlier (1980) work entitled ‘Competitive Strategy’ (Free Press ISBN 0-684-84148-7) and which are collectively regarded as a seminal work on corporate strategy. [back]

[2] This analytical model can be applied in a variety of settings, including, in-house project teams; at departmental level and in a not-for-profit environment. [back]

[3] Where it could be used to determine profit margins sought by various channel players. [back]

[4] Note that since this work was prepared there has been extensive European-wide consolidation among construction product suppliers and, partly through a combination of bringing expert consultants in-house and partly through the growth in Private Finance Initiative (PFI) and PFI-style contracts, the power of large construction contractors has grown. Initial industry findings where presented in the 1994 Latham report, which was then followed by 2 reports by Sir John Egan, a subsequent, 'Egan Initiative' and follow-on initiatives including 'Rethinking Construction', 'Constructing Excellence', and a spate of directives to encourage public sector construction procurement to focus trading with 'compliant' construction businesses. [back]

[5] From ICO Global Magazine, March 1997. ICO Global never its launched its global, satellite-based mobile phone network, as following the spectacular collapses of Iridium and Globalstar: two earlier global satellite companies, which lost $billions of investors’ money, nobody was keen on the investment. [back]

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