So, how do companies actually internationalize?
In order to understand in practice what options are available to a company wishing to tap into the opportunities offered by international markets, we need to look closer at how a company produces value. This what in business we call the ‘value chain’. The value chain is a framework which allows to simplify the complexity of the operations of a firm, reducing them into 4 essential stages: research and development, production, marketing, sales, and distribution.
In each stage of the value chain, the company has the opportunity to contribute positively to the firm’s competitive strategy, creating value for its end-customer. The higher the competitive strategy, the higher the potential returns. The value chain is a theoretical concept as it tends to oversimplify the processes which take place within a firm, however, it is a very useful concept as it allows us to understand where you have a difference between the total value (price) and the collective cost of performing value-creation activities. This is what we call a margin.
In greater detail the Value Chain identifies Primary Activities and Support Activities.
Primary Activities comprise:
- Inbound logistics (receiving, storing, distributing the inputs of a productservice)
- Operations (transforming inputs into a final value)
- Outbound logistics (distribution of the product to consumers)
- Marketing and sales (provide the means whereby consumers can purchase the product)
- Service (activities that enhance and maintain the value of the product and service).
Support Activities comprise:
- Procurement (acquiring the various resource inputs)
- Technology development (all value activities have a technology component, even if it’s know-how).
- Human Resources management (recruiting, training, developing and rewarding people)
- Infrastructure (financial planning, routines, quality control, etc..)
This is not always a linear process as there may be internal linkages (internal path dependencies) and external dependencies (relationships with external actors)The internal linkages which take place in the company and are not reflected by the value chain can be described through a pyramid in three layers: operational, managerial and strategic.
In order to discuss how this value chain can be ‘internationalized’ we can look at a simplified version, divided into 4 stages:
- Research and Development
- Sales and Service
The way in which companies internationalize in relationship to their value chain management is described through a high variety of entry modes, which will be addressed in a different article (Entry Modes in International Marketing).
This post will discuss:
1. How the Value Chain Works
2. The Virtual Value Chain
1. How the Value Chain Works
So far we have discussed the value chain for firms bringing products to the market, however, we need to account for the value chain brought by services, or the Service Value Chain. This was also studied by Porter, who identified the concept of value shop, whereby a “shop” is an organizational model focused on solving problems in the service environment.
In this case, value creation is obtained by problem-solving. Resources and mobilization and activities are carried out to resolve a particular customer problem. What is important to understand is that the value is not related to the solution itself but to the value of being able to address and solve a problem.
This is not a linear process, but a cyclical one.
- Problem finding (activities associated with recording a problem)
- Problem-solving (activities associated with generating alternative solutions)
- Choice (activities associated with choosing among different alternative solutions)
- Execution (activities associated with communicating and implementing the solution)
- Control and Evaluation (activities associated with evaluating how the implementation has solved the problem).
Service value chains can be exemplified by legal counsel or advice, for instance.
However, we do not have to conceive a business as only grounded in one or the other model, different parts of the same business can be seen as different value chains.
Production and distribution may resemble a value chain, whereas research and development of the value shop.
When a group of companies each specializing in one piece of the value chain, are linked together virtually to create and deliver products or services, we have a value network. This allows each company to focus on primary core competency, still providing a fully-rounded productservice.
As we’ll see in more detail when discussing the ‘P’ for the product in the international marketing mix the distance in the consumer’s mind between a product and a service can grow very thin, this is why it’s completely possible to describe a value chain which encompasses both chains. This is the case with soft services, whereby production and consumption happen at the same time, where the consumer is considered a co-producer and the serviceproduct element cannot be decoupled (as it would happen with hard services – like software).
The contemporary business landscape, therefore, is described more and more by types of businesses that are highly adapted and comprise, more often, both value chains. However, now more companies are trying to create similar strategies in their respective markets, where firms try to make sure decoupling the service and product component is always harder.
In the picture we also have a representation of the ‘moment of truth’ whereby we have, for instance in a consulting service, the opportunity to provide feedback on:
- The service value chain
- The product value chain
- The relative mix between the two chains
The moment of truth is important because the perception of the value of the productservice is now focused on the concept of a customer experience, where the distinctions we have made are even more intangible.
Customer experience is the use of products in combination with services to engage the individual customer in a way that creates a memorable event. This can be characterized into one of four groups: entertainment, educational, escapist and aesthetic based on the degree of (high or low) involvement and (high or low) intensity.
This applies to B2C markets, whereas for B2B markets companies enter the world of mass customization.
Mass customization is defined as the collaborative effort between customers and manufacturers to jointly search for solutions that best match customer’s individual specific needs with manufacturers’ customization capabilities. This combines the low unit costs of mass production processes with the flexibility of individual customization.
2. The Virtual Value Chain
Last but not least we can discuss the virtual value chain, which is an application of the value chain discussed so far into IT and Software development. This can be considered a supplement or an extension of the conventional value chain where the information processing itself can create value for customers. This is also structured in 4 steps:
- Define the information problem
- Organize, select, gather information
- Synthesize information
- Distribute Information
This typology of the value chain can, therefore, be applied in 4 types of businesses, those which relate to:
- Managing Risk (finance, controlling, auditing, accounting)
- Reducing Cost (re-engineering)
- Offering Products and Services (focused on customers’ satisfaction)
- Inventing New Products (creating new emergent technologies).
As each business does one or more of these 4 activities, the virtual value chain is somehow embedded in the traditional value chain.
As we’ve discussed in this post, the value chain is a useful tool to allow managers to simplify and understand the complexity of the operations which take place within a firm and allow a company to create value for its customers. Despite being a tool that was developed many years ago, it is still able to capture the nuances and variations that new firms in technology and the service industry and bring to the table.