The concept of the value chain was coined and explained by Michael Porter in his popular book “Competitive Advantage: Creating and Sustaining Superior Performance” in 1985. Value chain is a sequence of activities or practices which aims at creating and adding value to a product or a service. Value is added at every process of doing business. Businesses aim at enhancing their margins and thus they need to work on their operating procedure carefully. Businesses work to change input into an output by adding greater value in it. Thus the logic behind it is simple; the more value a company creates, the more profitable it becomes. When more value is created, the same is passed on to the customers and thus further helps in combining a competitive edge. One happy customers gets ten more customers. Value adds brand loyalty and brand awareness in markets. The primary activities of value chain are inbound logistics, operation, outbound logistics, marketing & sales and after sales service. These primary activities are supported by procurement, technology, human resource management and firm’s infrastructure. Products pass through a chain of activities in order, and at each activity the product gains some value.

Processes that go in primary and supporting activities of value chain are as follows:

Primary activities:

Inbound Logistics: involves relationships with suppliers and it includes all activities required to from placing order for raw material, receiving it, storing it, stacking it and circulate inputs. Inbound logistics is associated with receiving, storing, disseminating inputs for the operation such as material handling, warehousing, and inventory control, vehicle scheduling and servicing the suppliers.

Operations:  involves all the activities required to transform inputs into outputs (products and services). For example machining, packing assembly, equipment maintenance, testing, printing pasting, stacking and facility operations.

Outbound Logistics: is associated with distribution. All activities required to collect, store, and distribute the finished product. It includes reaching the finished goods to the point of consumption.  Warehousing, material handling, routing, selection of routes, mode of transport, order processing and scheduling.

Marketing and Sales: activities include market research, segmenting market, sales promotional activities, developing, positioning and branding. Marketing and sales activities inform buyers about products and services. The activities in marketing facilitate the purchase with advertising, promotion, sales force size, training and developing, channel selection, channel relation and pricing.

After Sales Service:  includes all the activities required to keep the product or service working effectively for the buyer after it is sold and delivered. Such as installation, repair, training, parts supply and product adjustment

Support activities: 

Procurement: is the acquisition of inputs, or resources, for the firm.

Human Resource management: This consists of all activities involved in recruiting, hiring, salary, training, developing, compensating, motivation and performance appraisal. A transparent, ethical Performance Appraisal system is never demoralizing or inhuman. What’s inhumane is failing to make the organization’s standards and values clear and transparent and not letting people know where they stand.

Technological Development: It pertains to the equipment, hardware, software, procedures and technical knowledge brought to bear in the firm’s transformation of inputs into outputs. The digital revolution has created an Information Age.

Company’s infrastructure: this facet shows a company physical infrastructure, intellectual infrastructure, human infrastructure, digital infrastructure etc. In short, it refers to internal strengths of the company and how well connected it is externally.

Example of Starbucks for a better understanding of value chain:  The Starbucks journey began with a single store in Seattle in the year 1971 by three partners who met while they were students at the University of San Francisco: English teacher Jerry Baldwin, history teacher Zev Siegl, and writer Gordon Bowker. To become one of the most recognized brands globally, Starbucks planned a mission statement “to inspire and nurture the human spirit – one person, one cup and one neighborhood at a time.” To achieve the mission the organizations concentrates on all primary activities such as:

Primary activities:

Inbound Logistics: The inbound logistics for Starbucks refers to selecting the finest quality of coffee beans from the coffee producers in Latin America, Africa and Asia. In the case of Starbucks, the green or unroasted beans are procured directly from the farms by the Starbucks buyers. These are transported to the storage sites after which the beans are roasted and packaged. The ready beans are sent to the distribution centers few of which are company owned and some are operated by other logistic companies. The company itself does the procurement to ensure high quality standards right from the point of selection of coffee beans.

Operations: Starbucks operates in 65 countries either in the form of direct stores operated by the company or as licensed stores. Starbucks has more than 21,000 stores internationally which includes Starbucks Coffee, Teavana, Seattle’s Best Coffee and Evolution Fresh retail locations. According to its sales figures, the company generated 79% of the total revenue during fiscal year 2013 from its company operated stores while the licensed stores accounted for 9% of the revenue.

Outbound Logistics: There is very little or no presence of intermediaries in product selling. Majority of the products are sold in their own or licensed stores only. As a new venture, the company has launched a new range of single-origin coffees which is sold through some leading retailers in the U.S. such as Guatemala Laguna de Ayarza, Rwanda Rift Valley and Timor Mount Ramelau.

Marketing and Sales: Starbucks invests in superior quality products and high level of customer services than aggressive marketing. However, need based marketing activities are carried out by the company during new products launches in the form of sampling in areas around the stores. At Starbucks at a point in time, some of their executives visited their coffee shops and noticed that good employees were losing their poise when faced with agitated customers. Instead of coming down on the individual employees, they developed new training material that eliminated the stress of these situations. The executives at Starbucks found that when they empowered their employees with tools they needed to serve customers happily, their employees gained their smiles back.

After sales service: Starbucks aims at building customer loyalty through high level of customer service at its stores. The retail objective of Starbucks is, as it says in its annual report, “to be the leading retailer and brand of coffee in each of our target market by selling the finest quality coffee and related products, and by providing each customer a unique Starbucks Experience.”

Support Activities:

Infrastructure: This includes all departments like management, finance, legal, etc which are required to keep the company’s stores operational. Starbucks well designed and pleasing stores are complemented with good customer service provided by the dedicated team of employees in green aprons.

Human Resource Management: The Company’s committed workforce is considered a key attribute in the company’s success and growth over the years. Starbucks employees are motivated through generous benefits and incentives. The company is known for taking care of its workforce and this is perhaps the reason for a low turnover of employees, which indicates great human resource management. There are many training programs conducted for employees in a setting of a work culture which keeps its staff motivated and efficient.

Technology Development: Starbucks is very well known for use of technology not only for coffee related processes (to ensure consistency in taste and quality along with cost savings) but to connect to its customers. Many customers use Starbucks stores as a make shift office or meeting place because of the free and unlimited wifi availability. The company in the year 2008 also launched mystarbucksidea.force.com as a platform where customers can ask questions, give suggestions and openly express opinions and share experiences. The company has implemented some of the suggestions given via this forum. Starbucks also uses Apple’s iBeacon System wherein customers can order their drink through the Starbucks phone app and get a notification when they walk in the store. Thus, Starbuck uses the available technology to their fullest strength.

Procurement: This involves procuring the raw material for the final product. The company agents travel to Asia, Latin America and Africa for the procurement of high grade raw material to bring the finest coffee to its customers. The agents establish strategic relationship and partnership with a supplier which is built up after reconnaissance and communication about the company standards. High quality standards are maintained with direct involvement of the company right from the base level of selecting the finest raw material which is coffee beans in case of Starbucks.

Conclusions: Starbuck’s rivals benchmark their business processes.

 Today e-commerce is become part of our life. The arrival of e-commerce and m-commerce (mobile) has transformed the entire retail sector.  Retailers are tapping multiple channels for selling their merchandise; from traditional stores, using catalogue, through the internet and more and more via smart phones and tablets, no stone is left unturned. Technological advancement means that the store is omnipresent! It’s now everywhere, in consumers’ pockets, at their homes and at the mall too. For surviving the competition in the e-commerce world distribution has become key component of the business. Supply chain and logistics experts have become key players and the other important element being real estate – strategic locations for Distribution Centres (DC).

While retailers are developing their multichannel strategy multichannel marketing which refers to the practice by which companies interact with customers via multiple channels, both direct and indirect, distribution strategies also need to be worked at a faster pace especially when the bar has been raised with delivery models like same-day and next-day delivery at the customer’s doorstep.

Retail supply chain executives go for locating fulfilment facilities closer to their customer base in order to meet service commitment goals such as aggressive delivery schedules.

Retail chains are therefore finding online logistics more cost-effective. They rather opt for this than open more traditional stores that require an entirely different kind of distribution model. Therefore, retailers are evolving their regional distribution networks with the addition of e-commerce distribution centres. Traditional warehouses which act as stores require lesser investment and machinery and fewer staff.  The new e-commerce distribution centres, which involve direct order fulfilment, can cost three times as much and involve three times as many employees.

Retailers need to consider points such as proximity to key customers, tax incentives, sales tax and the availability of local labour which are vital for business when searching for the right location for their e-commerce distribution centres. Also, the global spread of technology into multichannel retailing has also opened up new markets in both developed and developing countries. While online sales are growing in the United States and UK, China and Hong Kong are following the trend. China’s consumers are fast embracing e- and m-commerce and are spending most of their money online. And as technology and commerce is expanding faster, retailers are finding it difficult to keep pace with logistics and infrastructure because these two fields are still emerging with newer software and newer gadgets.

In most cases domestic logistics service providers are unable to provide services to fulfil high volumes of customer parcel shipping at low costs and within a realistic delivery time frame, this noticeably impacts the direct-to-customer channel. Retailers have to thus establish their own distribution networks or rely on outsourced express shippers.  This leads to an opportunistic gap in the market for third-party (3PL) and forth-party (4PL) logistics companies and investment in industrial real estate infrastructure.

In the US for the past two decades, U.S. companies have been shifting production to markets with lower labour costs. However, as energy costs rise and labor becomes more expensive in Asian markets, companies are increasing near-shoring and on-shoring. Firms which opt for all-water options but cannot tolerate the lengthy shipping times from Asia are shifting some operations to near-shoring destinations such as Mexico or Central and South America and even back to the United States.  With production and demand closer to home, retailers can respond more quickly to trends and changes in buying patterns.

Nearly 80 percent of retailers say that online sales have increased in the past five years with some reporting increase of 25 percent or more. This has forced retailers to change the traditional distribution network for their e-commerce model. 3PL and 4 PL providers have gained a huge role to play in the e-commerce business model.

Generally, 3PL provider’s main business is to provide logistical services as its core activities. The logistics services offered are based on the range of its logistics’ function. They include freight forwarders, courier companies and other companies integrating & offering subcontracted logistics and transportation services. 4 PL differs from third party logistics in some of these ways: 4PL organization is often a separate entity established as a joint venture or long-term contract between a primary client and one or more partners; 4PL organization acts as a single interface between the client and multiple logistics service providers; ideally all aspects of the client’s supply chain are managed by the 4PL organization; and it is possible for a major third-party logistics provider to form a 4PL organization within its existing structure.

4PL was originally defined by Accenture as a trademark in 1996 and defined as “A supply chain integrator that assembles and manages the resources, capabilities, and technology of its own organization with those of complementary service providers to deliver a comprehensive supply chain solution.” but the concept has almost changed at present.

4PLs have also been referred to as “Lead Logistics Providers”. In the present scenario, new crop of companies have emerged who are actual transportation companies too. While a 4PL is sometimes described as non-asset-owning service provider, their role is to provide broader scope managing of the entire supply chain. The 4PL model offers a platform to get companies thinking about long-term strategy; developing an idea of what they want their future supply chain scene to look like.

If you look closer, the 4PL model actually drives 3PL outsourcing. The difference between the two activities ultimately comes down to scope. In a traditional transactional role, the 3PL will hold on to scope—managing a warehouse, for example. With a 4PL model, the scope recedes and flows. The service provider scales resources depending on different skill set requirements that turn upwards.

If e-commerce brings the logistics industry closer to the point of consumption, it has boosted the demand in the logistics industry. Would it be wrong if we call Amazon and Wal-Mart logistics companies? At heart, these companies are retailers; but, actually on the basis of the economics of these two companies, Amazon and Wal-Mart are far, far better at handling the logistics of their trade than their competitors and hence they are the leaders. Distribution is their core competence.

If you read the case of Amazon.com one understands how important firm’s logistics is in e-commerce. Amazon.com has come a long way since its founder and chief executive officer, Jeff Bezos, stopped imagining the company as a virtual bookstore. It has evolved into an online retail giant that generated US $74.45 billion in revenues in 2013. It is worth mentioning that much of that came from its support of more than two million companies that used Amazon to sell their products online and distribute them to customers. Under the company’s various programs, Amazon not only provides its customers with a means of advertising and selling their products, but also offers to store those products in its fulfilment centres; pick, pack, and ship them; and provide customer service which includes handling returns.

In the process of developing its network to support those services, Amazon has built out an infrastructure which by recent account includes 145 warehouses around the world! 84 in the United States, four in Canada, 29 in Europe, 15 in China, 10 in Japan, and seven in India. This collectively accounts for more than 40 million square feet of space. Amazon has also made substantial investments in material handling systems, including the acquisition of Kiva Systems for $775 million in 2012.  Kiva is now a wholly owned subsidiary of Amazon, which designs robots, software, workstations, and other hardware that has been used in the distribution facilities of companies such as Staples, Office Depot, and The Gap. The systems produced by Kiva are expected to be an integral part of the distribution network now being developed by Amazon. Amazon has also made major investments in cloud computing. At the same time, the company has been developing transportation capabilities to support its Amazon Fresh same-day grocery business. That’s called might of an e-commerce company!

Industry analysis is a strategic tool designed for market assessment to provide a business with an idea about complexity of a particular industry. The industry analysis involves reviewing the economic, political and market factors that influence the way the industry has developed and is performing.  Major factors include the power exerted by buyers and suppliers, how competitive the market is and the likelihood of new entrants. Small as well as big businesses often spend a large chunk of time planning their firm’s operations. Majority of that time is spent planning initial operations and expected financial returns. Once the business is in progress, business owners continue the planning process to ensure their venture remains profitable. Industry analysis is an important part of a business planning. This analysis often looks at the external factors that can affect a company.

Industry analysis enables a company to develop competitive strategies to survive in a market and using the forces in its favor. The key to developing a competitive strategy is to understand the sources of the competitive forces. By developing an understanding of these competitive forces, the company can:

• Emphasize on its strengths, weaknesses, opportunities and threats (SWOT).
• Elevate its position in the industry.
• Clarify areas where strategic changes will result in the greatest payoffs.
• Emphasize areas where industry trends indicate the greatest significance as either opportunities or threats.
• Trim down weaknesses and threats by using competitive advantages.

Everything that goes on in the industry and the external factors affect the businesses existing businesses. Therefore a better understanding of the industry helps a business survive better. More understanding of the industry highlights chances of prosperity for a business as it has more advantage and protection. While preparing a business plan the general industry economics, participants, distribution patterns, factors in the competition is described to portray the survival and growth of a business. The internet has created an enormous impact on the state of industry information. Finding information isn’t really a problem anymore. Today at click of button, loads of information is accessed by anybody. The Internet has brought in a lot of transparency. Two decades back, dealing with information was more of a problem of sorting through it all than of finding raw data. Today, there are websites for business analysis, financial statistics, demographics, government policies, trade associations, suppliers, buyers, supply chain managers – you name it and just about everything and you will have access to all that is required for making a business plan and industry analysis.

For making an accurate industry analysis you must know:

Industry participants: You should know who else sells in your market. You can’t easily describe a type of business without describing the nature of the participants. There is a huge difference, for example, between an industry like broadband television services, in which there are only a few huge companies in most of the countries, and one like dry cleaning, in which there are tens of thousands of smaller participants. The participants in the industry have their own style of running their businesses. The leaders in the industry call the shots. The procedures in the industry can change suddenly, which in turn can challenge operations of many smaller companies.  Today we see that the fast food business is composed of a few international brands participating in thousands of branded outlets, many of them are franchised. We have a gamut of local, national and multi-national chains evolved and the scenario which looks very competitive.

Economists talk of consolidation as an encouraging economic parameter; we see smaller participants disappearing from the market and a few large players emerging. In accounting, the majority of the world’s auditing services are performed by only four accounting firms. Known as the ‘Big 4’, these firms completely dominate the industry, auditing more than 80 percent of all US public companies. In addition, these mammoth organizations advise on tax and offer a wide range of management and assurance services. They are Deloitte LLP, PricewaterhouseCoopers, Ernst & Young and KPMG.

The last major change to the fortunes of the global accounting firms followed the collapse of the Enron Corporation which was audited by Arthur Anderson. In the outcome of the collapse, the accounts company was found guilty of criminal charges relating to its business practices. Although the conviction was eventually overturned, the damage to its reputation meant Arthur Andersen was unable to recover and eventually sold most of its business to members of what would come to be known as the Big 4.

Distribution Pattern: Products and services can follow many paths between suppliers and users. One needs to know how distribution works in an industry. Each sector has its distribution pattern set. One needs to see whether in a particular industry retailers are supported by regional distributors, as is the case for computer products, magazines, or auto parts. Does an industry depend on direct sales to large industrial customers? Do manufacturers support their own direct sales forces, or do they work with product representatives? Brilliant marketing logistics covers physical distribution plus managing marketing channels. The importance of transportation to economic growth and productivity is undisputed. Transportation confers place-utility and time-utility to products and services.  At the macro level, progressive transportation modes contribute handsomely to the national economy. At the micro level, techniques have been developed and refined for determining the economic impact of transportation programs and projects. It has been observed that there is a shift in hiring services of contracted and third party transporters by many organizations.

Some products are almost always sold through retail stores to consumers, and sometimes these are distributed by distribution companies that buy from manufacturers. In other cases, the products are sold directly from manufacturers to stores. Some products are sold directly from the manufacturer to the final consumer through mail campaigns, national advertising, or other promotional means.

In many product categories there are several alternatives, and distribution choices are strategic. Encyclopedias and vacuum cleaners are traditionally sold door-to-door, but are also sold in stores and direct from manufacturer to consumer through radio and television ads.

Technology can change the patterns of distribution in an industry or product category. The internet, for example, changed options for software distribution, books, music, and other products. Cable communication is changing the options for distributing video products and video games. Distribution patterns may not be as critical to most service companies, because distribution is normally about physical distribution of specific physical products such as a restaurant, graphic artist, professional services practice, or architect.

So far the pharmaceutical companies used to sell medicine stocks directly to 5000 odd stockiest and distributors, they in turn sell the products to 10000 wholesalers and the wholesalers then sell them to six lakh retailers. This trade practice has been existed in the industry for several years and All India Organization of Chemists & Druggists (AIOCD) was directly controlling this arrangement disliked by many pharma companies and patient community.

Industry sources said that the new order in the pharmaceutical trade is going to be in place in Maharashtra to start with. The representatives of the pharma trade and industry had a meeting with the Commissioner of Food & Drug Administration last week and he is understood to have told the industry and trade that no wholesaler should be denied direct supplies of drugs by the manufacturer. Denial of drug supply to any wholesaler would amount to restrictive trade practice and will be in violation of the Drug Price Control Order and Competition Act attracting penal action. The new distribution system will be enforced by other states also shortly. Drug manufacturers are not however happy with the new distribution system as they may have to deal with a large number of wholesalers now onwards and that may add to additional costs.

Competition: It is essential to understand the nature of competition in your industry. This is still in the general area of describing the industry or type of business. Explain the general nature of competition in this business, and how the customers seem to choose one provider over another. What are the keys to success? What buying factors make the most difference? Is it price? Product features? Is it service? Support, training, delivery schedules what is it? Are brand names important in the market? Which are the leading brands, why are they leading? What positioning strategies have been used by the marketers? So you see there is so much to find out about the competition.

The market is determined by supply and demand. Creating and maintaining relationship with customers is become an inseparable part of business. The concept of CRM is viewed differently in different sectors of business. Customer relationship or customer care is not just being polite to them – it is looking at the entire customer experience – or walking in the shoes of the customers. This journey starts before you even meet your customer, the trick is to forget all that you know or think you know about the market. Start thinking why your customers would want to buy your product? How it would solve their problems? How the substitute product would satisfy their needs? How you product reaches them in time? With companies offering technology-based solutions for everything, customer care has become more important than ever before. Sales literature and indeed entire campaigns are based on describing the technology, usage, power of the product, marketing channel details, price points etc.

In the computer business, for example, competition might depend on reputation and trends in one part of the market, and on channels of distribution and advertising in another. In many business-to-business industries, the nature of competition depends on direct selling, because channels are impractical. Price is vital in products competing with each other on retail shelves, but delivery and reliability might be much more important for materials used by manufacturers in volume, for which a shortage can affect an entire production line.

Market leaders: The market leader is dominant in its industry and has substantial market share. If you want to lead the market, you must be the industry leader in establishing an innovation friendly organization, developing new business models and new products or services. The market leaders usually have the cutting edge technologies. They offer superior solutions to the customer’s problems. And, most importantly their products are well differentiated. Market ledgers have an edge over the other players in the market. They make the strategic changes and changes in the policies.  The following graph shows strengths and challenges in the construction sector of India.

India is on the verge of witnessing a sustained growth in infrastructure build up. The construction industry has been witness to a strong growth wave powered by large spends on housing, road, ports, water supply, and rail transport and airport development. While the construction sector’s growth has fallen as compared to the pre-2008 period, it has picked up in the recent past. Its share as a percentage of GDP has increased considerably as compared to the last decade. To put things in perspective, the total investment in infrastructure – which in this case also includes roads, railways, ports, airports, electricity, telecommunications, oil gas pipelines and irrigation – is estimated to have increased from 5.7% of GDP in 2007 to around 8.0% by 2012. The Planning Commission of India has proposed an investment of around US$ 1 trillion in the Twelfth five-year plan (2012-2017), which is double of that in the Eleventh five-year plan.

Besides Indian Railway Construction Limited (IRCON), National Buildings Construction Corporation (NBCC), Rail India Transportation and Engineering Services (RITES), Engineers India Limited (EIL), in private sector M N Dastur and Co, Hindustan Construction Company (HCC), L&T and GVK are leaders.

Industry reports are prepared by the following:

Government Agencies: They prepare and compile various industry reports to judge the overall economic health of the nation. Examples of these are reports by the Bureau of Labor Statistics (BLS) and International Monetary Fund (IMF).

Research Firms: These firms conduct market surveys and compile different industry reports and sell them to companies and government organizations. These reports are purchased to facilitate decision making. Firms such as PWC, Ernst & Young, IMBR are famous for preparing industry analysis reports.

Individual Companies: Different companies in an industry prepare industry reports for their own use in order to facilitate decision marking and internal management. These industry reports are generally not available to outsiders.

An Industry report consists of the following elements:

Industry definition: An industry report includes a comprehensive definition of the industry, mentioning what the industry includes and what comes outside its purview.

Major industry players: It mentions the names and other relevant information about major companies that generate the largest revenue in the industry.

Market share: The report presents a breakdown of the different markets of the industry and its share in each market.

Historical and current trends: These trends include the facts and figures (such as revenue, sales and profits) of various companies in the industry. Historical trends in the industry are generally presented for five to ten years and the current trend pertaining to the prior financial year.

Employment statistics: It includes an account of the total employment figures and distribution in different companies within the industry. Key statistics also include the composition of men and women in the labor force.

SWOT analysis: This is an overall analysis of the industry in terms of its strengths, weaknesses, opportunities and threats.

Achievements: It mentions the significant milestones and achievements of the industry. This could include new innovations in the industry or the industry’s contribution to social-economic development.

Outlook: The report includes the prospects of the existing companies in the industry as well as the scope for new players.

An industry report contains graphs, charts and tables, generally supported by written commentary. This enables even non-professionals to get an understanding of the industry.

Some important insights such as low cost production structure (compared to the industry cost structure) could be through economies of scale or other operational efficiencies, strong technology capability, location to customers (if close, time to deliver to market will be relatively fast and shipping costs will be low) and sustainability of the business if taken into account in analyzing the industry will be of great help.

It is critical that you understand what an industry’s key success factors are; the only way to discover them is to do a thorough industry analysis.