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Value chain in e-COMMERCE

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(Faculty MBA, TIAS) 07217003909
MBA (2nd semester)

The Value Chain

The value chain, also known as value chain analysis, is a concept from business
management that was first described and popularized by Michael Porter. A value chain
is a chain of activities for a firm operating in a specific industry. The business unit is the
appropriate level for construction of a value chain, not the divisional level or corporate
level. Products pass through all activities of the chain in order, and at each activity the
product gains some value. The chain of activities gives the products more added value
than the sum of added values of all activities. It is important not to mix the concept of
the value chain with the costs occurring throughout the activities.

A diamond cutter can be used as an example of the difference. The cutting activity may
have a low cost, but the activity adds much of the value to the end product, since a
rough diamond is significantly less valuable than a cut diamond. Typically, the described
value chain and the documentation of processes, assessment and auditing of
adherence to the process routines are at the core of the quality certification of the
business, e.g. ISO 9001.

Historical context

Over the years, some businesses have controlled almost all factors of production and
distribution (Ford in its early days) whereas others have outsourced almost everything
(Dell). In the early days of industry, large enterprises controlled and owned most factors
of production and businesses like Ford Motor Company in the USA had their own
foundries, railroad, forestry and electricity generating plants, In the UK, Cadbury’s and
Lever Brothers went so far as to build villages and amenities for their workers. The
motivation for this vertical integration was varied but included cost and quality control,
worker loyalty and protection of proprietary processes. As well as control of production,
resources and employees, businesses like Ford also controlled the retail sales and
service network.

Ford Motor Company developed its structure over many decades of steady growth but,
even prior to the advent of e-Business; this kind of structure was being broken down, as
a monolithic type of organization like this is less able to respond to changing market
requirements. Furthermore, external specialized organizations may be able to offer
ancillary services such as transport and power more cheaply than a business like Ford
Motor Company could do it for itself. Ford was an extreme case of internal control of all
factors of production and distribution, whereas most other businesses had long
maintained a mixture of some in-house capabilities together with services sourced from
other businesses.

Porter’s Value Chain Model

One model to help understand this network of processes and services is what Michael
Porter (1985) calls the ‘Value Chain’. Porter’s work on competitive strategy suggests
that organizations should re-evaluate their value chain and concentrate on the
operations that they can do best. Other processes should ‘out-sourced’ to specialists. E-
Business has facilitated this by providing a set of standards for participants to work with.

Evans & Wurster (2000) outline the progress of Dell from a business that in 1984
offered a simplified product offering with orders taken by fax/telephone – a simplified
service with wide reach. In moving to Internet delivery, Dell then offered individualized
configurations, price combinations and technical support. These enhancements could
only previously have been obtained from specialized dealers or direct agents at a
premium price and Dell now offers these to a wide audience at a very competitive price.
The customer wins as their needs are at the centre of the process.

Porter distinguishes between primary activities and support activities. Primary activities
are directly concerned with the creation or delivery of a product or service. They can be
grouped into five main areas: inbound logistics, operations, outbound logistics,
marketing and sales, and service. Each of these primary activities is linked to support
activities, which help to improve their effectiveness or efficiency.

There are four main areas of support activities: procurement, technology development
(including R&D), human resource management, and infrastructure (systems for
planning, finance, quality, information management etc.). The chain consists of a series
of activities that create and build value. They culminate in the total value delivered by an
organization. The ‘margin’ depicted in the diagram is the same as added value which
expresses the way a business differentiates itself through configuration of its value

The drivers for product differentiation and value creation are policy choices (what
activities to perform and how), linkages (within the value chain or with suppliers and
channels), timing (of activities), location, sharing of activities amongst business units’
learning, integration, scale and institutional factors. Porter and Millar (1985) argue that
information technology creates value by supporting differentiation strategies.

To analyze the specific activities through which firms can create a competitive
advantage, it is useful to model the firm as a chain of value-creating activities. Michael
Porter identified a set of interrelated generic activities common to a wide range of firms.
The resulting model is known as the value chain and is depicted below:

Porter’s Value Chain

Primary Value Chain Activities

Inbound Marketing
> Operations > d > > Service
Logistics & Sales

The goal of these activities is to create value that exceeds the cost of providing the
product or service, thus generating a profit margin.

• Inbound logistics include the receiving, warehousing, and inventory control of

input materials.
• Operations are the value-creating activities that transform the inputs into the
final product.
• Outbound logistics are the activities required to get the finished product to the
customer, including warehousing, order fulfillment, etc.
• Marketing & Sales are those activities associated with getting buyers to
purchase the product, including channel selection, advertising, pricing, etc.
• Service activities are those that maintain and enhance the product's value
including customer support, repair services, etc.

Any or all of these primary activities may be vital in developing a competitive advantage.
For example, logistics activities are critical for a provider of distribution services, and
service activities may be the key focus for a firm offering on-site maintenance contracts
for office equipment.

These five categories are generic and portrayed here in a general manner. Each
generic activity includes specific activities that vary by industry.

Support Activities

The primary value chain activities described above are facilitated by support activities.
Porter identified four generic categories of support activities, the details of which are

• Procurement - the function of purchasing the raw materials and other inputs
used in the value-creating activities.
• Technology Development - includes research and development, process
automation, and other technology development used to support the value-chain
• Human Resource Management - the activities associated with recruiting,
development, and compensation of employees.
• Firm Infrastructure - includes activities such as finance, legal, quality
management, etc.

Support activities often are viewed as "overhead", but some firms successfully have
used them to develop a competitive advantage, for example, to develop a cost
advantage through innovative management of information systems.

Value Chain Analysis

In order to better understand the activities leading to a competitive advantage, one can
begin with the generic value chain and then identify the relevant firm-specific activities.
Process flows can be mapped, and these flows used to isolate the individual value-
creating activities.
Once the discrete activities are defined, linkages between activities should be identified.
A linkage exists if the performance or cost of one activity affects that of another.
Competitive advantage may be obtained by optimizing and coordinating linked activities.

The value chain also is useful in outsourcing decisions. Understanding the linkages
between activities can lead to more optimal make-or-buy decisions that can result in
either a cost advantage or a differentiation advantage.

The Value System

The firm's value chain links the value chains of upstream suppliers and downstream
buyers. The result is a larger stream of activities known as the value system. The
development of a competitive advantage depends not only on the firm-specific value
chain, but also on the value system of which the firm is a part.

E-commerce in India
The cutting edge for business today is e-commerce. Most people think e-commerce
means online shopping. But web shopping is only a small part of the picture. The term
also refers to online stock, bond transactions, buying and downloading software without
ever going to a store. In addition, e-commerce includes business to business
connections that make purchasing easier for big corporations.

E-commerce is generally described as a method of buying and selling products and

services electronically. The main vehicle of e-commerce remains the Internet and the
World Wide Web, but uses of e-mail, fax and telephone orders are also prevalent.

Electronic commerce is the application communication and information sharing

technology among trading partners to the pursuit of business objectives. E-commerce
can be defined as modern business methodology that addresses the needs of the
organization, merchants and consumers to cut costs while improving the quality of
goods and services and speed of service delivery. E-commerce is associated with the
buying and selling of information, products, and services via computer networks. A key
element of e-commerce is information processing.

The effects of e-commerce are already appearing in all areas of business, from
customer service to new product design. It facilitates new types of information based
business processes for reaching and interacting with customers-online advertising and
marketing, online, order taking and online customer service etc. It can also reduce costs
in managing orders and interacting with a wide range of suppliers and trading and
trading partners, areas that typically add significant overheads to the cost of products
and services.

Gartner Group predicted in April 2001 that the B2B e-commerce in the Asian and Pacific
region will reach US$ 220 billion this year, which will be 24 per cent of the worldwide
total. In the year 2000, this figure was US$ 96.8 billion or 22 per cent of the worldwide
total. In the year 2005, the Asian and Pacific region will account for 28 per cent of the
worldwide B2B e-commerce transactions, which itself will grow to US$ 2.4 trillion
(People’s Daily Online, 7 April 2001).

A recent report of eMarketer released in May, 2001 says that the number of Internet
users in the Asian and Pacific region will increase dramatically from 48.7 million in the
year 2000 to 173 million in the year 2004. It will then comprise more than 27 per cent of
the global Internet user community compared with 21 per cent in the year 2000. The
same report estimates the number of Internet users in India will be about 5.8 per cent of
the total number in the Asia-Pacific region (eMarketer, 10 May 2001).

It is against this backdrop of the world at large and Asia-Pacific in particular that we
have to examine the developments in India. The Government of India has long
recognized the need for development of IT industry and information infrastructure as
these are twin engines for growth of the economy. Deeper penetration of IT applications
in the economy, and in the society as a whole can help boost the economy. E-
commerce applications can make it easier for the country to better integrate with the
global markets, the e-marketplace. This has led the government, over the last few years
to formulate liberal policies for the development and growth of the IT industry.

The IT sector as a whole has grown at a compounded annual growth rate of about 30
per cent every year for the last few years. The total production during the current year,
i.e. 2001-2002 was Rs 809 billion (US$ 17.3 billion), out of which software exports
account for Rs 3,655 billion (US$ 7.8 billion).

NASSCOM (National Association of Software and Service Companies) had recently

released findings of its survey to evaluate the e-commerce scenario in India. As per
preliminary findings of the survey, the total volume of e-commerce transactions in India
was about Rs 450Crores in the year 1999-2000. Out of this volume, about Rs 50Crores
were contributed by retail Internet or business-to-consumer transactions, and about Rs
400Crores was contributed by business-to-business transactions.

With the regulatory framework (IT Act and Digital Signature) in place and improvement
in telecom infrastructure, increase in PC penetration could lead to a sizeable e-
commerce transactions in India in the next two years. In keeping with global norms, it is
expected that business-to-business transactions would continue to constitute a manor
chunk of e-business transactions in India. Thus, e-commerce is not just a western
The most talked about and well-endorsed feature of e-commerce is its global flavor.
Evidently, e-commerce has also started to show its true potential in India. While on one
hand, India’s e-commerce solutions are becoming a sought after commodity around the
world, even e-commerce based businesses are leaving their distinct marks of
technology competitiveness, viable business model and entrepreneurship. E-business
can indeed emerge as a major opportunity for India. This acquires twin connotations of
e-commerce and e-business transactions from local businesses and a huge opportunity
for software exports to other countries by quickly joining the e-business bandwagon.
India’s twin assets (the software industry and rapidly restructuring industry sector)
sector has been taken into consideration.

• As of September 2002, there was a PC base of 7.5 million PCs.

• More than 80 per cent of standalone PCs sold during last two years were driven by the
need to access the Internet.
• Ninety one per cent of India’s corporate web sites are located overseas.
• Internet access continues to be most widespread amongst the 18-24 year age group.
However, all age groups have seen vast increases in access over the last 18 months. A
significant development is that almost 11 per cent of people over the age of 40 now
access the Internet.
• Males continue to outnumber females in accessing the Internet at 77 per cent
compared to 23 per cent. This has however increased from the ratio of 82:18 in June
• The Internet and e-commerce industry employs approximately 82,000 people. These
include web developers, web designers, system analysts, ISP infrastructure providers,
marketing staff, e-software professionals, etc. It is projected that by March 2003, the
Internet and e-commerce industry would employ over 300,000 people.
• India has about 1.6 million households connected to the Internet.
• Internet users on an average are estimated to be accessing the Internet for 6 hours a
week. The profile of Internet users in India is dominated by:
• The professional/corporate segment, which accounts for around 43 per cent of Internet
• Inching close behind is the student community represented by school and college
goers. This segment contributes close to 38 per cent of Internet surfers.
• Over half (59.2 per cent) use the Internet as an information resource, 11.3 per cent
use it as an educational tool and just under 8.2 per cent use it for entertainment.
• When asked what are the most frequently used services online, 73.4 per cent
answered e-mail, 77 per cent answered search engines and 23 per cent said they use it
for downloading/ uploading software.
• Of the total Internet users, around 20 per cent own credit cards and around 14 per
cent own mobile phones.
According to the NASSCOM survey, considering the interest the Government is taking
in the growth of the market, e-commerce in India will witness a significant jump over the
next three years.
• Based on these preliminary findings, experts have concluded that penetration of
Internet and e-commerce transactions in India will increase by leaps and bounds. It is
being stated that in the case of business-to-business transactions, the Indian industry
will reach online penetration of 5 per cent by 2003.
• Revenue streams would increasingly be aligned with the emerging global model, it is
being anticipated. This would mean that the majority of the revenues would come from
transactions; while a smaller amount would be realized from advertising revenues would
come from transactions, while a smaller amount would be realized from advertising
revenues. It is expected that by 2003, more than 75 per cent of revenues of Internet
business-to-consumer business would come from transactions. The advertisement
revenues would amount to about 8 per cent of total add spend by the companies.

• Analysts also believe that one of every four non-resident Indians (NRIs) would make
some form of purchase from India-based web sites by 2003.

IT companies: Some of the preliminary findings on e-commerce/e-business software

exports potential are as follows:

• In the year 1999-2000, Internet and e-commerce related software and services export
from India brought in US$ 500 million out of an estimated US$ 4 billion software and
services exports.
• Supply Chain Management optimization is one of the strongest drivers of the global e-
commerce solutions market, as it spurs business-to-business transactions. More than
68 per cent of Indian software houses have informed of strong expertise in supply chain
and distribution management solutions.
• Almost 32 per cent of IT company respondents have identified web based consumer
business as a major opportunity area, with expected paybacks beginning in three to four
• Some of the emerging hot areas of e-commerce services are: legacy application
Internet application integration; Customer Relationship Management (CRM), Customer
Management (CSM), Enterprise Resource Planning (ERP) and Electronic Data
(EDI) migration to web based models; new IT frameworks and integration with business
strategy (strategic IT consulting); e-commerce training services, business web site
development and maintenance. The user side, e-commerce means business.

Some of the highlights of the domestic e-commerce scenario based on the findings of
NASSCOM’s survey includes the following:
• Among user organizations, more than 90 per cent expressed keen awareness about
the increasing adoption of e-commerce and its potential benefits.
• More than 55 per cent of corporate respondents said that e-commerce transitions were
integral of their corporate plans. Of these nearly 85 per cent were industries which did
not have direct or frequent contact with end consumption.
• About 23 per cent of top 500 companies in India already have started some form of e-
commerce. These have been facilitated through the up gradation of existing IT systems
or fresh installations configured or e-commerce transactions.

E-commerce growth

During the year 2000-2001, two major Industry Associations produced separate reports
on e-commerce in India. Both the reports came out around the same time, namely
June-July 2001. One was prepared by the National Committee on E-Commerce set up
the Confederation of Indian Industry (CII), while the other was commissioned by the
NASSCOM and prepared by the Boston Consulting Group. Both the reports are
optimistic about the growth of e-commerce in India. The Confederation of Indian
Industry (CII) report estimates the volume of e-commerce to grow to Rs 500 billion (US$
10.6 billion) in the year 2003, out of which B2B will be Rs 420 billion (US$ 9 billion) and
B2C will be Rs 80 billion (US$ 1.7 billion) (CII, 2001). The NASSCOM-BCG Report, on
the other hand, estimates for the same year that the total volume of e-commerce will be
Rs 1,950 billion (US$ 41.5 billion), out of which Rs 1,920 billion (US$ 41 billion) will be
on account of B2B and Rs 3 billion (US$ 64 million) will be on account of B2C
(NASSCON and BCG, 2001). E-commerce volume for the year is estimated to be Rs
150-200 billion (US$ 3.2-4.2 billion) (NASSCON and BCG, 2001).

The earlier expectations of value creation through pure-play dot-coms, large online
market sizes, businesses reducing their procurement and inventory costs through B2B
have been belied. The euphoria of Internet revolution is over. But there is a deeper
realization that the opportunities and threats of the Internet are very real. Organizations
that have understood the power of the Internet and have implemented well thought out
business strategies have leveraged B2B and B2C e-commerce to create significant
gains in their business. LG Electronics India Ltd. is a case in point. It expects to realize
margins up to 1.5-2 per cent through B2B supply chain initiatives on information sharing
and procurement efficiencies. Amul, a milk cooperative, is successfully using e-
commerce to deepen its brand loyalty. Likewise, corporate in the automotive sector are
improving their customer relations through this medium.

Some of the new names that are rediscovering e-commerce through new portals at
relatively low capital cost, without venture capital funding include: KEY2CROREPATI,
strategy on the Net is the key to these new portals. The new entrepreneurs are very
clear in what they offer. Since they are not setting web sites with a view to sell them
later, unlike the first wave of dot-coms, they put in their best efforts to check offerings
and their processes before inviting customers in (Business Today [India], September

It has been seen that while the web sites and e-commerce portals are setup by
technically oriented entrepreneurs, they have no experience of the logistics involved in
delivering products to distant areas. B2C e-commerce is likely to remain small because
of these constraints. In fact, when the e-tailing market grows in size, high delivery costs,
logistical bottlenecks as well as regulatory requirements will act as major barriers.
Coupled with this are the cultural barriers where most shoppers are uncomfortable
buying items they are unable to see or touch. Consumer protection is also not very
effective. If goods are not delivered after electronic placement of orders, the consumers
may have to follow long process for redressal of their grievances. These are some of
the limiting factors for B2C e-commerce.

Domain names can now be registered in Indian languages too.

offers domain names using the alphabet in Indian languages. These will be valid like
other domain names and are expected to help non-English speaking people take
advantage of the benefits of Internet. Currently, one can register in Hindi or Kannada

Most of India’s banks and financial institutions have set up web sites. Online stock
trading has also taken off in India with the Securities and Exchange Board of India
(SEBI) making efforts to standardize message formats and address issues pertaining to
technology, connectivity, security, surveillance and monitoring. Companies such as
<> and <> actively promote online trading on their web sites.
A number of web sites cater exclusively to the expatriate Indians and offer valuable
information on investment decisions, real estate, etc. Online portals have been set up
for B2B e-commerce exchanges in the areas of automobiles, steel industry,
construction, insurance, shipping and pharmaceuticals. A number of sites also deal in
auctions. Most of the sites are in B2B segment, while there are some in the B2C
segment as well. Vortals which cater to specific information needs and provide services
across areas as diverse as cooking, women, online worship, specific sports (e.g.
cricket), matrimonial, jobs, travel and tourism in India have also appeared in large
numbers. Entertainment and games too have moved online and a number of portals
catering to these areas are already in business.

A number of e-payment gateways have sprung up for B2B and B2C e-commerce
financial transactions. There are four payment gateways operated by ICICI Bank,
Citibank, HDFC Bank, and Global Trust Bank. But all these are closed user groups.
There are no real time settlement systems available to let the users of one gateway
settle their accounts with users of another group. No inter-bank settlement is possible
as of now. This delays e-commerce transactions. The B2C transactions can, however,
be enabled by the credit cards which are growing in number. The credit cards today
number 5.1 million with total spending of Rs 81 billion (Business India, 14-27 May
The industry is alive to the need of being active players in the Internet world. It has
aggressively participated in the recent round of appointment of the Internet Corporation
for Assigned Names and Numbers (ICANN) of new registrars in this region. Two
companies have been accredited as registrars in the .com domain. While registration of
web sites for .com, .org and .net could earlier only be done through Network Solutions
Inc., a number of new web sites such as <> and <>
are now offering this service in India.

It may be added here that the software industry which is the greatest strength of India
grew at a compound aggregated growth rate of nearly 50 per cent during the last
decade. The Indian software and services industry has attained a reasonably robust
growth of 30 per cent even during the last year which was a year of turbulence, tragedy,
terrorism and slowdown in world economy. The software exports rose to US$ 7.8 billion
in the year 2001-2002 form US$ 6.3 billion in 2000-2001. Majority of the Fortune, 500
companies have outsourced their software requirements to India. The software
solutions from India have been moving up the value chain and are engaging more and
more electronic commerce and web based technologies. Internet and e-commerce
related software and services export from India accounted for nearly US$ 1200 million
in the year 2000-2001. This figure is expected to rise to US$ 3 billion by 2003-2004
(NASSCOM, 2001). Many of the software companies are specializing in supply chain
and distribution management solutions which are the key drivers of the global e-
commerce solutions market. The NASSCOM-BCG Report estimates that the e-solutions
market, which worldwide is currently of the order of US$ 180 billion, will grow to US$
640 billion in 2005. India should be able to tap up to US$ 4 to 13 billion in the year 2005.
This segment includes SCM, CRM, knowledge management (KM), Internet services
and Application Services Provider (ASP).

Challenges in E-Commerce Adoption

Each chapter in this book deals with a unique situation that depends both on the form of
e-commerce used and the social and cultural norms of the customers and vendors.
However, several challenges are common to setting up virtually any e-commerce
system. For example, when the PAN e-commerce mall was established in Singapore as
a regional portal, one of its main objectives was to establish a secure form of online
payment using credit cards. This was a significant challenge because of the need for
encryption technologies, the existing social norms that often prohibit such online
transactions, and the limited number of credit-card holders in some Asia-Pacific

E-commerce purchases often complement regular storefront acquisitions, however

more frequently; these electronic purchases compete with conventional storefront
operations. Issues common to traditional storefront stores, such as touching, packaging,
and shipping the product, suddenly become very important factors to consider when
setting up an effective and profitable e-commerce portal. The research reported in this
book looks at most of these e-commerce adoption criteria.

E-commerce is expected to become increasingly important to businesses in Asia. The

research reported in this book presents insights into how this technology might be better
adapted to rural settings, and how policy decisions can affect e-commerce


A developing country can become industrialized and modernized if it can extensively

apply IT to enhance productivity and international competitiveness, develop e-
commerce and e-governance applications. An information-based society or knowledge
based society is composed of IT products, IT applications in society and economy as a
whole. Many countries in Asia are taking advantage of e-commerce through opening of
economies, which is essential for promoting competition and diffusion of Internet
technologies. The Internet is boosting efficiency and enhancing market integration in
developing countries.

The developed world has had a long lead over the developing countries in the telecom
infrastructure. The world average of teledensity is 15 per cent compared to the
developed world average of 55 to 60 per cent. Same is true of PCs, Internet
connections, and the number of Internet hosts. All these traditional indicators for India
as seen above are still small. But the total numbers of Internet connections are large in
absolute numbers. Large enough to have a critical mass of 10 to 20 million users to be
able to make an impact on e-commerce and e-governance. In the next 3 to 5 years,
India will have 30 to 70 million Internet users which will equal, if not surpass, many of
the developed countries. Internet economy will then become more meaningful in India.
The number of e-transactions will be large enough to sustain the Internet economy.