Question

What is splitting up the value chain?

Short answer

Splitting up the value chain refers to the process of dividing the series of activities involved in creating a final product or service into separate parts, which may be outsourced, handled by different departments, or specialized. Companies may choose to split their value chain to focus on core competencies, reduce costs, access resources and expertise, and increase flexibility and adaptability. Examples of splitting the value chain include outsourcing production, third-party logistics, franchising, and strategic partnerships.

Step-by-step solution

Defining the Value Chain

The value chain is a concept introduced by Michael Porter, which refers to a series of activities that companies perform throughout the process of creating a final product or service. These activities are classified into two categories: primary activities and support activities. Primary activities are directly involved in the creation of the product or service, while support activities facilitate the primary activities. This includes activities such as design, production, marketing, distribution, and customer support.

Understanding the Components of the Value Chain

The value chain can be broken down into the following components: 1. Inbound Logistics: Procurement and storage of materials and components. 2. Operations: The production process and transformation of materials into the final product. 3. Outbound Logistics: Distribution and transportation of the final product to customers. 4. Marketing & Sales: Creating demand, promoting, and selling the product or service. 5. Service: Post-sale support to customers, such as maintenance or customer service. Support activities include: 1. Procurement: Sourcing and purchasing of materials and services. 2. Technology Development: Research, development, and IT systems that support primary and support activities. 3. Human Resource Management: Recruitment, training, and development of employees. 4. Infrastructure: General organizational support, such as finance, administration, and legal services.

Reasons for Splitting the Value Chain

Companies may choose to split their value chain to: 1. Focus on core competencies: By outsourcing or focusing on specific activities, companies can concentrate on what they do best and drive competitive advantage. 2. Reduce costs: Outsourcing activities to more cost-effective providers can lead to cost savings, especially when activities are not considered a company's core competency. 3. Access resources and expertise: Splitting the value chain allows companies to access specialized expertise and unique resources that are beyond their in-house capabilities. 4. Flexibility and adaptability: Splitting activities enables companies to adapt more easily to changes in the business environment and quickly respond to new opportunities.

Examples of Splitting the Value Chain

Here are some examples of how businesses might split up their value chains: 1. Outsourcing production: A clothing brand might focus on designing and marketing its products, while outsourcing the manufacturing process to factories with lower labor costs. 2. Third-party logistics: A company may use a third-party logistics provider to handle the transportation and distribution of its products, allowing it to concentrate on its core competencies. 3. Franchising: A fast-food corporation might franchise its brand, allowing individual franchisees to manage their own value chain components while maintaining brand standards. 4. Strategic partnerships: A technology firm might form a strategic alliance with another company that has complementary competencies, allowing both to leverage their strengths and gain a competitive advantage. By understanding the components of a value chain and the reasons for splitting it up, organizations can make informed decisions on how to optimize their activities and generate the most value for their customers.