Finance:Virtual value chain

The virtual value chain, created by John Sviokla and Jeffrey Rayport, is a business model describing the dissemination of value-generating information services throughout an Extended Enterprise . This value chain begins with the content supplied by the provider, which is then distributed and supported by the information infrastructure; thereupon the context provider supplies actual customer interaction. It supports the physical value chain of procurement, manufacturing, distribution and sales of traditional companies.

To illustrate the distinction between the two value chains consider the following: “when consumers use answering machines to leave a message, they are using an object that is both made and sold in the physical world, however when they buy electronic answering services from the phone company they are using the marketspace—a virtual realm where products and services are digital information and are delivered through information-based channels.” (Rayport et al. 1996) Many businesses employ both value chains, including banks, which provide services to customers in the physical world at their branch offices and virtually online. The value chain is separated into two chains because the marketplace (physical) and the marketspace (virtual) need to be managed in different ways to be effective and efficient (Samuelson 1981). Nonetheless, the linkage between the two is critical for effective supply chain management.

New developments lead to new strategies

In the last decade the advancement of IT and the development of various concepts in manufacturing, such as 'just In time (JIT) have led to the situation where businesses no longer focus purely on the physical aspect of the value chain as the virtual value chain became equal in importance.

Michael Porter stated that no value is added by the Internet itself, however the Internet should be incorporated into the business’ value chain. As a result the Internet affects primary activities and the activities that support them in numerous ways. Porter describes the value chain in the following:

“The value chain requires a comparison of all the skills and resources the firm uses to perform each activity.”

The products and services the business supplies to the market need to conform to a channel that fits the customer’s needs. Therefore this channel controls the strategy of the business. The channel comprises different events, and each of these events should accord with the overall strategy of the business.

In the virtual value chain (VVC), information became a dynamic element in the formation of a business’ competitive advantage. The information is utilized to generate innovative concepts and ‘new knowledge’. This translates to new value for the consumer. The VVC model reveals what function they have in the chain. If they are not currently offering information-based services (i.e. Internet services), how they can make the transition.

The transfer of information between all events and among all members is a fundamental component in using this model. In the VVC the creation of knowledge/added value involves a series of five events: gathering, organization, selection, synthesis, and distribution of information.

Stages of the value adding information process

Businesses implement value-adding information by using the three stages of the Rayport and Sviokla model:

1. Visibility—By using information, businesses learn the ability to view physical operations more effectively. This means that the foundation for the virtual value chain is used to co-ordinate the activities of the physical value chain. Furthermore, with the assistance of IT, it is then fully possible to plan, implement, and assess events with greater precision and speed.
2. Mirroring capability—Businesses recreate their once-physical activities for virtual ones by producing a parallel value chain in the marketspace. In other words, the business moves the value-adding activities from the marketplace to the virtual marketspace.
3. New customer relationships—Businesses present value to the customer by new means and in new fashions. IT creates value in the marketspace. The new relationship between business and customer is based on IT. This implies that products and services are presented by IT and part of these products and services are in the form of bits.

Relevance to the business world

The virtual value chain offers a view that encompasses the entire network along with its employment of IT. The VVC model has a relationship to the supply chain and the goal of that relationship is to produce materials, information and knowledge for the market. IT maintains the relationship among the members of the chain. The VVC model does not indicate any shifts in the market, or how and when the customer’s needs will change.

New technological developments in IT are drastically changing the way businesses operate. Virtual business’s internal and external relationships are managed by IT and value adding and generation of ideas are relying more and more on IT. This trend has led to a different approach to value chain thinking. Using this approach Mary Cronin separates the VVC into three elements: inputs from supplier, internal operations, and customer relations.

• The inputs from supplier element focuses on the Internet and how it can add value to the business’ acquisition activities. In other words, businesses use the Internet to find different suppliers quickly (effective) and for different purposes (efficient).
• The internal operations element encompasses events which are based on the effective procurement and distribution of information within the business. It is essential that businesses can emulate this model because of the large role information plays in the business world. With use of the Internet, the business can procure and distribute information globally with relative ease and low cost.
• The customer relations element applies information directly from the customers’ needs and attitudes about the product or service to add value. The Internet provides the direct information about the customer’s needs and attitudes. The Internet is also used to distribute information about the products and services to the market (i.e. electronic catalogues). Following the distribution, forums and discussion groups collect the necessary information about the products and services that the business provides.

See also

• Value (marketing)
• Porter generic strategies
• Porter 5 forces analysis
• Marketing strategy
• Strategic management