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) There are many businesses that 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 separate chains because both 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 Information Technology (IT) and the development of various concepts in manufacturing, like Just In Time (JIT) have led to the situation where businesses no longer focus on purely the physical aspect of the value chain as the virtual value chain is equal in importance.

Michael Porter, creator of the value chain, stated that there is no value 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 be in accordance to the overall strategy of the business.

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

In the virtual value chain the ‘virtual’ indicates that the value adding steps are performed with information. 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, synthesization, and distribution of information. The completion of these five events, allows businesses to generate new markets and new relationships within existing markets. The process of a business refining raw material into something of value and the sequence of events involved is similar to that of a business collecting information and adding value through its cycle of events.

Stages of the value adding information process

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

# 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.
# Mirroring Capability – Businesses duplicate their once physical activities for virtual, by producing a parallel value chain in the marketspace. In other words, the business moves the value adding activities from the marketplace to the marketspace.
# 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 strongly based on using 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 has the benefit of having a view that encompasses the entire network along with its strong employment of IT. The VVC model has a strong 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. Each business’ 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 is focused of the Internet and how it can add value to the business’s acquisition activities. In other words, business’ with use of the Internet have the capability to find different suppliers quickly (effective) and for different purposes (efficient).

* The internal operations element is in regards to the business’ value adding events which are based on the effective procurement and distribution of the information within the business. It is essential that businesses can emulate this model because of the increasing 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 concentrates on applying the information directly from the customers’ needs and attitudes about the product or service to add value. The internet is a useful tool in acquiring 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.

Management

Today managers need to concentrate on how their business creates value in both the physical and virtual world. However, the methods for creating value are different in these worlds. By careful interpretation of the differences and interactions among the value adding events of the physical and virtual worlds, managers can more clearly visualize the strategic issues facing the business.

Managers must learn to utilize and value the virtual world of information. "By thinking boldly about the integration of place and space," Sviokla and Rayport comment, "executives may be able to create valuable digital assets that, in turn, could change the competitive dynamics of industries." (Rayport et al. 1996) To properly use the information, that is to create value from it, managers must explore the marketspace. Although the value chain or the marketspace is similar to that of the marketplace, there is an increased dynamic involved. The processes for transferring raw information to products and services are unique to the information world.

The conventional value chain model uses information for solely support, not as a source of value itself. However, with the arrival of the Internet the virtual value chain has been enabled, allowing businesses to use information for the creation of innovative products and services that are exclusive to the marketspace. An example of using the VVC to create such services includes the Federal Express Corporation which recently created a customer designed website to track packages by using their air bill number. FedEx has been able to capitalize using the VVC by adding value for the customer (for free) and in turn has increased customer loyalty in an intensely competitive market. In this increasingly information based economy managers must extract value from both the physical and virtual value chains to succeed.

This study establishes that the strategy of IT is an important issue for a business. Productivity, quality, cost structure and profitability are all characteristics that are directly affected by IT. It is essential for businesses to use IT in the most effective way and to have knowledge to implement IT systems. Lastly, both users and businesses need to realize the potential that IT has for their business.

ee also

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