The top companies around the globe are discovering a powerful and effective source of competitive advantage and create value for the shareholders. This source is referred to as the value chain. This chain entails separating business systems into a cycle of value generating activities. The idea of chain value came up from Michael Porter in 1985 when he suggested how customer values accumulates along a series of activities that ultimately lead to the end good, product or service. Porter gave the description of the value chain as the series of internal activities or processes that a company undertakes in designing, producing, marketing, delivering and supporting the product.
Porter also suggested that a company’s value chain and the way it undertakes individual activities are reflection of the company’s history, strategy, approach in implementing the strategy, and the basic economics of the individual activities themselves. He categorized business activities into two main categories, the primary and the support activities. The primary activities are the ones involved in the transformation of inputs into outputs directly, and in delivery of the output and management of after sales services (Overbeck 2009). These activities are always in line with the companies’ activities, and they include the following activities. First of all, inbound logistics, which includes activities related to warehousing, storage and handling of materials. Secondly, an activity which evaluate whether the operation involve transformation of inputs into final products. The third activity is the outbound logistics, which involves processing orders and distribution of products. The fourth activity describes sales and marketing, which involves, pricing of product, communication and channel management. The last activity is services and this involves installation, different parts and repairs.
Support activities, on the other hand, provide the primary activities and they include the following; first and foremost, procurement, which is the process of purchasing raw materials, consumable items, assets and other supplies. The second function is technology development and it includes procedures, expertise and technological inputs required in all value chain activities. The third function is human resource management, which involves selection, placement, rewards, and appraisal, placement, and labor/employee relations. The last function is the firm infrastructure, which involves planning, finance, accounting, general management, quality management, and legal and government affairs.
John Shank and V. Govindarajan described the value chain in broader terms in comparison to Porter. They described value chain for any company as the value creating activities right from basic raw from the initial suppliers to the point where the products reach consumers’ hands. They view the firm as a component of the overall series of value-creating processes.
Competitive Advantage and Customer Value
In order to prosper and survive in a particular industry, companies must meet two criteria: first, they must supply what the consumers need and second, they must survive competition. A company’s overall competitive results from the difference between the value the company offers to its consumers and the cost of creating that value. It is crucial to note that competitive advantage with relation to products takes two likely forms; one differentiation advantage or offering and secondly, the relative low cost advantage.
Differentiation advantage results when consumers perceive a company’s product as superior compared to the same products from other companies. In this case, customers are willing to pay a higher price or premium for such products. Differentiation may occur because of the company’s ability to deliver goods timely, produce better quality goods, and incorporating other factors that offer unique customer service value. After successful products differentiation, the management of the company has two options of exploiting the advantage. One, raising the price of the commodity until it offsets the costs of improving the products for customers’ benefits, therefore maintaining the market share or setting the price below the full premium level in an attempt to curve its market share.
Under low cost advantage, a company enjoys relative low costs advantage if its total costs of production are lower than the average market costs. This advantage allows the company to undertake one of two things: the company can price its products lower than the market price to gain market share while maintaining the current profitability; or, match its prices to the prices of the competitors and increase profitability in return (Overbeck 2009). There are several sources of cost advantage, for instance, accessibility to low-cost raw materials, accessibility to low cost distribution channels, and superior management among others. Companies can also derive cost benefit from exploiting economies of scale in its operations.
Case Study: Wal-Mart
Wal-Mart is among the 500 largest companies in the Fortune 500 and it is spread all across the world. Undoubtedly, the largest retail chain deals with virtually everything beginning with food and ending with consumer electronics. It leads other major companies in the Fortune’s List in terms of revenue generated like Microsoft and GE. In simple words, the retail chain sells anything that a homemaker would ever think of at affordable price ranges. Its aggressive market strategy and aggressive online marketing has resulted to the widespread acceptance of the company in cities and towns alike (Crosson and Needles 2010).
Primary Activities for Wal-Mart
Inbound and Outbound Logistic Management
Inbound and Outbound Logistic Management of the company involves fast, responsive and effective transportation system, with relatively 7000 company owned vehicles for servicing the distribution centres. These dedicated fleets of vehicles enable the shipping of products from the distribution centres to the other stores within a remarkable period of two days and replenish the shelves at least twice every week. The company hires very experienced drivers, whose movements are tracked through Private Fleet Driver handbook. This enables the drivers to be aware and understand the terms and conditions for safety of Wal-Mart products and property. There is also a set code of conduct to govern their behaviours and conduct while at work.
To increase efficiency, the company makes use of a logistics technique, Cross Docking, a system that allows the company to pick finished goods directly from the manufacturing site of the supplier, sorts the goods out and supplies them to the customers directly, without having to go through the company. This system allows the company to save on handling and storage costs of the finished goods, and thus eliminates the need for some distribution centres and stores. This system enabled the company to shift from the supply chain to demand chain, which means that rather than the retailers pushing the goods into the system, customers pull the goods where and when required. Today, about 60% of Wal-Mart’s inbounds freights are udder the management of suppliers.
Wal-Mart operations fall under three main segments, Wal-Mart Stores, Sam’s Club, and Wal-Mart International. Wal-Mart Stores forms the largest segment and accounts for an approximate of 68% of the total sales. Wal-Mart Stores have three different retail formats with the following sections. First, Super Centres which offers a full line supermarket and a wide variety of products; second, Discounts Stores, which offers limited stock of foods and a wide variety of other products; third Neighbourhood Markets, which offers limited variety of general merchandise and a full-line supermarket.
SAM’S Club segment comprises of membership warehouse clubs in the US and accounts for an approximate of 13% of the total sales. Wal-Mart international comprises of operations from countries outside the US and include operations in Argentina, Germany, Canada, Puerto Rico, South Korea, United Kingdom, China, Brazil and Mexico. This segment generates approximately 20% of the total sales. This segment operates under different formats like the restaurants, retail stores, Super Centres, Sam’s Club and Discount Stores.
Marketing and Sales
Sam Walton believed that discounting retailing would completely transform it. He, therefore, aimed at creating a brand of its Merchandise at low price. Wal-Mart prides itself on the everyday low price, which offers customers with a pleasant, clean and a friendly shopping experience.
The company’s procurements process entails reducing the purchasing costs as low as possible to enable it to offer the best price in the market to its customers. The company bypasses all intermediaries and directly procures goods from manufactures. The company has distribution centres in different geographical locations. The company’s own warehouses supply more than 80% of its total inventory. The company ensures a steady and consistent flow of products, which ensure that goods are readily available as and when needed. It uses different and sophisticated technology to manage the inventory at the distribution centres. These include the Bar code, RFID, and the Magic wand- a hand held computer system. The RFID and the Bar codes are useful in labelling different products, bins, and shelves at the centre. The hand held computer is useful in guiding employees to the position of specific products. Every employee at the distribution centres is able to access information on the inventories levels. The computer updates the main server on the packaging, shipping, and storage, which allows time saving by avoiding unnecessary paperwork. This also allows supervisors to monitor their employees and give them guidance and directions. This procurement process allows Wal-Mart to improve efficiency levels and satisfy customer’s needs quickly.
Technology is one the inevitable spheres in today’s companies, since it ensures operations are easier and efficient. Traditionally, technological purposes were mainly for storage and billing system, but with the increased level of operations and size of the company, there is a need to keep and maintain track of the materials and staffs all across the globe. Initially, the company identified Bar codes as the suitable technology, but due to some limitations, a new technology, the RFID, was put in place. This system requires minimal human intervention to perform tasks like billing, supply management and material tracking. This system allows detection of the location of a person, place, product or object without a direct line of sight. This is possible through an electromagnetic challenge/response exchange.
Human Resource Management
Top management of Wal-Mart spends most of their time in the stores and they closely monitor the operations and movements of their staffs through the RFID. The staffs in the company are referred to as associates instead of clerks, an idea born by the founder of the company. The company encourages innovations and suggestions from the associates and the innovations and suggestions are well rewarded. The company also believes in incentives and profit sharing with the associates, decentralization and stock purchase.
With the rapid expansion of the company, it is crucial that the company has a very effective communication system. For this reason, the company has its own satellite communication system, which allows the management to monitor all activities in particular stores at any point in time enables them to and take appropriate action depending on what is happening. The company ensures that the unproductive stock is as minimal as possible. The company improves IT infrastructure to ensure that inventory is available when needed by the customer, while at the same time reducing the overall inventory. The use of bar coding and RFID technologies is also notable investment in the company’s infrastructure.
Competitive Environment and Advantage
Wal-Mart has a unique competitive environment with general merchandisers being their major competitors. However, supermarket retailers and warehouse clubs also present some competitive pressure. The distribution retail industry is constantly experiencing changes and growth and is substantial in size. There is extensive competition on store size, merchandise mix, innovations and technology, pricing and location both nationally and internationally.
In general merchandising, the main competitors are the Kmart and Target, retail superstores like Bath and Circuit City and Bed. Sam’s Club major competition is Costco, though the latter has fewer stores and warehouses but greater revenues. Considering that the company is one of the largest retailers in the world, its position in the markets is strong with rivalry competitors being weak. The market is rather crowded but the company has lowest prices and costs. Threat of substitute products is rather weak, and the company makes efforts to ensure they remain innovative in meeting customers’ needs. The bargaining power for most suppliers is also weak. For most suppliers, Wal-Mart remains their largest account, and thus they would easily do what Wal-Mart wants them to do. The bargaining power for customers is also weak since there is a wide customer base and a substantive demand for low prices products (Crosson and Needles 2010). The threat for new entrant is not very strong since the company’s scale of operations is so wide, that it would take years for a new company to be on the same level. Even well established companies around the globe would still have an extremely difficult time trying to match the prices and costs of Wal-Mart.
One of the many Wal-Mart strategies is offering its products at an everyday low price. The value chain of the company helps in identifying how the company achieves many of its strategies. Firstly, its supply chain management is exceedingly cost-effective, for instance, the company has a reputation of imitating competitors merchandising successful concepts. The company expects and rewards suggestions from employee and this saves the company the research costs. The company has the ability to track the movement of all its goods in the entire value chain; whether in distribution centres, shipment, on shelf, in store or even at the cash register. In addition, this tracking takes place in real time, which minimizes the risks for losses of inventory. Moreover, streamlining suppliers is key is key in maintaining appropriate inventory.
Operations and distribution strategies have been helpful in achieving low prices. The company puts up stores outside large cities and mostly within 200miles of existing centres and stores. The company majorly uses word of mouth for advertisements, thus saving on advertisement costs. The other strategies have always been providing superior and quality services to the customers, starting from greetings right from the entrance, offering shopping carts, and directing them where the products are located.
Supportive activities also play a huge role in ensuring that the strategies of the company remain successful. Such activities like investments in technology to track the products, good relationships with the suppliers, employee incentives, and training and attractive compensation policies have indirectly results in the success of the company strategies.
Porter’s value chain states clearly that the key primary activities are very critical in developing competitive advantage for every company across the globe. Support services assist in ensuring that the primary activities are successful in attaining the competitive advantage. A company’s margin largely depends on the effectiveness in performing all the mentioned activities efficiently, so that the price a customer is willing to pay for the goods is way above the costs of the activities involved in its production. It is in the efficiency of these activities that a company generates superior value. It is also necessary to note that competitive advantage is achieved through two main ways: providing better differentiation or lowering costs. In differentiation, a company offers very unique products that are irresistible to the customers. In such a case, most customers will be willing to pay a higher amount for the goods and services for their uniqueness. Through this, a company is able to gain superiority over the rival companies (Overbeck 2009).
Under the low price strategy, a company devices ways of reducing costs of production so that it can be able to offer low prices that the competitors without making losses. This requires much efficiency in production and capitalizing on economies of scale. Through this strategy, customers choose to buy the product because there is still a very wide demand for low priced goods. However, the companies that are able to strike a balance between the two strategies emerge as the superior qualities in production of their goods. In most cases, companies employing one strategy end up with inferior quality.
Wal-Mart has been one of the companies that have been able to attain competitive advantage by striking a balance between differentiations of products and lowering prices. It is crucial to note, however, that Wal-Mart’s key competitive advantage focuses in delivery of goods and services at the lowest possible prices and its main business strategy of cost leadership (Crosson, and Needles 2010). The company has efficient supply chain management, which ensures fast, efficient and effective delivery of goods thus reducing on its distributions, which would otherwise be extremely high considering the size of its operations. The company, however, continues to be innovative in the production of its goods and services to ensure that they remain unique and of good quality. Customers, therefore, chose Wal-Mart products over those of the competitors, not just because of the low prices but since the quality of the goods and services.