Translating an inspired idea into a robust business plan
011 The Value System
The “value system” is also referred to as the “industry value chain”. In contrast to the “value chain”, which considers value added within a business, the value system extends the value chain beyond the boundaries of the business and recognises that a business is dependent on relationships with suppliers and buyers. The term value system underlines the fact that activities are not necessarily organised in a linear fashion, but viewing the activities that make up the final product as a chain is also useful and underlines the linkage between the concept of the “value chain” and the “value system”.
Competitors may have organised their value chain differently. For example, a mobile phone operator may have its own retail outlets, thus ensuring that the services can be sold directly to consumer. A competing operator without its own retail outlets will have to ensure adequate levels commission are paid in order to ensure that independent retailers sell its service. In the first case costs are fixed whereas in the latter case costs are variable but there is lack of control. In formulating your company’s strategy, the costs, rewards and risks of different strategies should be analysed carefully.
Analysis of the value system may reveal that a source of competitive advantage for your business could be a better selection of suppliers, for example suppliers that have a labour cost advantage. Make or buy decisions are also affected by a downstream analysis of the value system, and the distribution strategy can be optimised by understanding the distribution value chain. For example, some manufacturers have their own retail outlets but also supply competing retailers. The question is whether or not such an arrangement produces competitive advantage. The decision as to what of the industry value chain you would operate in would also be affected by scale economies in the different parts of the value system. You may choose to play only where your firm has the greatest scale economies and a clear cost advantage.
The industry supply chain is a related concept which focuses on the flow or raw materials to the finished product.