Types and Importance of Value Chain Integration
1. Value chain integration is the process in which several enterprises located in a shared market obligingly plan to manage, implement and plan the flow of information, goods, and services from the source point to the consumption point in a way in which the customer perceived value increases and one in which the efficiency of the chain is optimized henceforth creating a competitive advantage for all the involved stakeholders (Barney, 2013). In simpler terms, value chain integration can be defined as a high-level model of how a certain business receives its raw materials, add value to them by employing various processes, and finally sell the finished products to their consumers (Chyi & Yang 2009). The value chain analysis examines every step that the business goes through starting from when the raw material is received all the way to the final end-user of the products. The goal of this analysis is to deliver the maximum possible value using the least possible cost.
There are two types of value chain integration namely the vertical and horizontal integration. Vertical integration is the process whereby there are several steps which takes place during the production and supply of a certain product or service (Dälken, 2014). These processes are controlled by a single entity or company with the aim of improving the entity’s power in that particular marketplace (Frohlich, & Westbrook 2012). As for the horizontal chain integration, in order to improve the markets shares of a company or entity, the strategy used is acquiring another similar company. This merger can occur in the same geographical region or in other locations if one wishes to increase the company’s reach.
An example of vertical chain integration is whereby a company outsources some services to another entity (Bowersox, Closs & Stank, 2009). A case scenario is whereby one company is tasked with producing bottles, but the company does not necessarily produce the drinks carried by those bottles. This happens when one company is not well endowed to produce the bottles on its own but through outsourcing, such a company can continue producing the drink, and from the profits made, they can decide to start the production in future (Gunasekaran, & Ngai, 2010). On the other hand, a case example of horizontal integration is similar to what happened to YouTube. Notably, the company was taken by Google because it had a loyal and strong user base. As such, Google would increase its viewers consequently making more profits (Lee, 2000). Markedly, Google could have accomplished this without having to do a complete takeover, but as the situation stood, a takeover was the cheaper option at the moment (Fawcett & Magnan, 2014).
There are numerous benefits associated with value chain integration, and some of them are as listed below:
- There is improved supply chain coordination
- Numerous opportunities to expand the company are created since one gets increased control over the inputs.
- It is easy to capture downstream and upstream profit margins
- There is an increased entry barrier to potential competitors since a firm can have sole access to a scarce resource.
- Economies of scale are achieved since one can sell more of a similar product.
- Economies of scope are achieved since one can share the resources which are shared amongst different products.
- There is an heightened market power
- The cost of global trade reduces significantly since one can operate factories across different locations.
Competitive advantage refers to a situation whereby a certain entity or company has the upper hand in the business world. As such, this company is popular with consumers compared to other entities offering similar services. With a competitive advantage, a company is guaranteed is more profits, and it is easier to retain a strong fan base. Competitive advantage also enables a company to easily expand to other locations since the reception is good every time they open a new branch. Notably, this advantage is achieved by extending excellent services to consumers. Also, one needs to produce quality goods which will not disappoint the consumers (Kaplinsky, & Morris 2014). With customer satisfaction, one is guaranteed of customer loyalty, and it is rare for them to turn to your competitors for services and products.
Relationship Between Competitive Advantage and Value Chain
Additionally, there are those companies which gain competitive advantage solely because they offer unique services or because they joined the market first. Joining the market early means that the company gets numerous customers since there is no option to choose from. As time goes by, these customers get used to the services extended by these companies, and it becomes hard to settle for competitors. Notably, in a situation where one is used to one particular service provider such as a mobile operator, switching to other service providers can be hectic since one would need to inform all their contacts about the switch. As such, they may choose to stick to their original operator making it have a competitive advantage compared to the rivals(Normann & Ramirez, 2011)
On the other hand, value chain integration is achieved by either outsourcing some of the company’s services to separate entities with the aim of improving quality or by purchasing other entities to expand the company. Either way, value chain helps in creating a competitive advantage since it helps a company to make positive strides henceforth making it more superior in that particular marketplace. Notably, if a company decides to purchase other companies offering the services it desires, it basically transfers the customers of the purchased company to their customer base. This automatically makes it have a competitive advantage compared to the smaller rival companies. In this regard, the relationship between value chain and competitive advantage is the fact that value chain helps a company gain a competitive advantage over its rivals.
In the business process management, one requires to ensure that the business constantly makes positive improvements. Markedly, when starting a business, the sole aim is to ensure that the business grows and earn more and more profit with time. Business process management can be defined as a discipline in the operations management through which a company can use different methods to automate, optimize improve, measure, analyze, model and discover business processes. BPM mainly focuses on improving the corporate performance of a business by ensuring that the business process is managed perfectly. Some of the processes can be unstructured and variable or structured and repeatable (Horvath,2010).
Value chain and competitive advantage are important concepts in Business Process Management since the main aim of this process is to ensure that the business performs optimally. To perform optimally, the business needs to expand its market reach and also ensure that the quality of the products they sell is high. This way, it will be easier to achieve the full lifecycle of the process which includes process design, modelling, execution, monitoring, optimization, and re-engineering. One of the full lifecycles is attained, a company can be guaranteed a competitive advantage consequently making more sales.
Most profitable industries which attract great returns often attract other new firms. These new entrants ultimately cause a decrease in profitability for the other firms in that particular industry. The only way of ensuring that this does not happen is by making the entry of new firms difficult. This way, there will be a reduced risk of abnormal profitability which is defined as the minimum level of profit an industry needs so as to stay in business. There are several factors which affect the threat posed by new entrants such as barriers to entry, government policies, absolute cost, capital requirements, network channels, economies of scale, cost disadvantages, brand equity, product differentiation, expected retaliation, and access to supply channels.
Importance of Value Chain and Competitive Advantage in Business Process Management
In most occasions, a substitute product will use a different technology compared to the one already in the market. This is done in order to solve the same economic need. A case example is tap water which can be used as a substitute for coke. However, Pepsi does not qualify as a substitute for Coke because both brands use similar technology. Notably, if people increasingly prefer to drink tap water, this will lower the profits made by both Coke and Pepsi. Some factors which can lead to substitutes include the buyer’s propensity to substitutes, buyer’s switching costs, ease of substitution, availability of a close substitute, number of potential substitute goods in the market, and supposed level of product diversity.
The negotiating power of consumers can also be defined as the available market for outputs. This is the ability of the customers to mount pressure on a firm which consequently affects the customer’s sensitivity to changes in product prices. The good thing is that companies can reduce buyer power by putting in place a loyalty program. Notably, the buyer power will be high is they have numerous options hence they should be given fewer choices. Factors affecting the bargaining power includes firm concentration to buyer concentration ratio, bargaining leverage, availability of existing substitute products, buyer’s information availability, and buyer’s switching cost, and buyer’s price sensitivity (Grigore, 2014).
The negotiating power of sellers can also be described as the available market for inputs. The suppliers of services, labor, components, and raw materials have a low power over the firm especially when there are few alternatives. Markedly if a firm is making biscuits, and only one person sells flour in the neighborhood, there will be no alternative of who to purchase from. As such the suppliers can refuse to work with the company and if they do, they can decide to charge excessively. Some factors affecting the buyer’s power over merchants include the degree of diversified inputs, the presence of substitute inputs, the impact of inputs on cost, and employee solidarity (Dälken, 2014)
For most firms, the intensity of their competitive rivalry majorly determines the competitiveness in the industry. By understanding the industry rivals, one can successfully market a product. However, this depends on how the consumers perceive the product and how it is distinguished from competitor products. Factors affecting competitive rivalry include firm concentration ration, powerful economic strategy, and level of marketing expense, competition between offline and online businesses, and sustainable competitive advantage, (Magretta, 2011)
Any firm which wishes to succeed in the industry needs to use this approach which will guarantee that they gain competitive advantage. Through this model, a company can be guaranteed that it stays afloat since consumers and suppliers will have little power over it.
References
Barney, J. B. (2013). Gaining and sustaining competitive advantage.
Bowersox, D. J., Closs, D. J., & Stank, T. P. (2009). 21st century logistics: making supply chain integration a reality.
Chyi Lee, C., & Yang, J. (2009). Knowledge value chain. Journal of management development, 19(9), 783-794.
Dälken, F. (2014). Are porter’s five competitive forces still applicable? a critical examination concerning the relevance of today’s business (Bachelor’s thesis, University of Twente).
Dälken, F. (2014). Are porter’s five competitive forces still applicable? a critical examination concerning the relevance for today’s business (Bachelor’s thesis, University of Twente).
Fawcett, S. E., & Magnan, G. M. (2014). The rhetoric and reality of supply chain integration. International Journal of Physical Distribution & Logistics Management, 32(5), 339-361.
Frohlich, M. T., & Westbrook, R. (2012). Arcs of integration: an international study of supply chain strategies. Journal of operations management, 19(2), 185-200.
Grigore, A. M. (2014). Book Publishing Business in Romania-An Analysis from the Perspective of Porter’s Five Force Model. Revista de Management Comparat International, 15(1), 31.
Gunasekaran, A., & Ngai, E. W. (2010). Information systems in supply chain integration and management. European journal of operational research, 159(2), 269-295.
Horvath, L. (2010). Collaboration: the key to value creation in supply chain management. Supply chain management: an international journal, 6(5), 205-207.
Kaplinsky, R., & Morris, M. (2014). A handbook for value chain research (Vol. 113). University of Sussex, Institute of Development Studies.
Lee, H. L. (2000). Creating value through supply chain integration. Supply chain management review, 4(4), 30-36.
Magretta, J. (2011). Understanding Michael Porter: The essential guide to competition and strategy. Harvard business press.
Normann, R., & Ramirez, R. (2011). Designing interactive strategy: From value chain to value constellation. John Wiley & Sons.
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