Value Chain System Essay
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The value chain concept was created by Michael Porter and explained in his book “Competitive Advantage”, published in 1980. The value chain is a series of activities that create and build value- culminating in the contribution of total value to the organization. Porter used the concept of value chain as a systematic approach to examining the development of an organization’s competitive advantage in the marketplace. In using the value chain concept, the total activities undertaken by a business are split into Primary Activities and Support Activities.
Primary activities relate to inbound logistics, operations, outbound logistics, marketing and sales, and service. Support activities include procurement, technology development, human resource management, and firm infrastructure. Intel No doubt, Intel has emerged as the market leader in the design and manufacture of microprocessors, having an almost unbeatable advantage over its competitors. Yet Intel has realized that the best way to retain its market position is to make it easy and efficient for people to do business with the company.
Since 1998, Intel has developed and used an e-business strategy to maintain relationships with its customers, employees and suppliers. The company’s goal is to become a 100% ‘e-business enabled’ corporation. In terms of the value chain concept, Intel has made remarkable progress and reaped tangible benefits in the volume of business it does on the Web, as well as created savings of time and money for both itself and its customers. (Pallato, 2001) Let us analyze Intel’s strategy in terms of the primary value chain activities: Inbound Logistics
Prior to implementation of its e-business initiative, Intel used the traditional methods of pen, paper and telephone to place and track its supplies and suppliers. Furthermore it ordered supplies only in response to customer orders. Consequently the company lost out on many business opportunities, where it could not meet emergency demands, changing customer needs or large orders for want of adequate stock. However this all changed with the launch of its e-business initiative in 1998.
Today, Intel uses the Internet to speed the flow of information between itself, its suppliers and customers. By tracking its deliveries and supplies over the Web, the company has reduced its order and manufacturing lead times. It tracks its supplies from various countries all over the world. Intel’s goal is to move towards a 100% automated system for its supplies and purchases. Operations Intel uses its Web based e-business system to aid in the quick exchange of details and queries pertaining to customer orders, design specifications and proprietary information.
Design specifications and models can change every 6 months. Intel has many made-to-order deals with big volume direct customers and this almost instantaneous system can shave off a week or two in design and delivery of the final product, enabling the product and its suppliers to take full advantage of its novelty and price in the market. Outbound Logistics Intel uses its web based system to track deliveries to customers and resellers. It can thus expedite delivery by noting friction points, ascertaining the reasons and smoothing shipments there.
Using its ‘vendor driven’ inventory management system, Intel can maintain its inventory levels to respond to fluctuating customer demand, make reliable forecasts and shipments on time. Marketing & Sales Intel has also improved time to market for its products to customers. By putting its customer order entry system on the Web, it has reduced errors by 75%. It can take orders round the clock, where more than 25% of its transactions occurring after normal business hours. Its ability to establish links with over 75,000 system resellers worldwide has led to considerable increase in its sales volumes.
Online sales doubled from US$ 1 billion to US$2 billion a month. Hundreds of Intel suppliers use the Web to check the status of inventory levels, payments and shipments. Service Intel focuses on many areas of support and service for all its products. From advanced data centers, application platforms, architecture planning, integration of business applications, e-commerce applications and solutions, system migration and server consolidation. Employing a set of highly skilled consultants having considerable technical expertise in designing, building, implementing and optimizing solutions on Intel architecture.
Intel provides a variety of services in the areas of wireless, hardware design, networking and communications, software development, business strategies and solution providers. Intel has established alliances with other leading software technology providers and solutions such as Oracle and SAP to give added value to its customers. It has a variety of solution blueprints on its website advertising its successful applications from a variety of industries. A database of solution providers and resellers of Intel products and solutions has been provided on a technological, geographical and language basis for ease of access and use. Intel Website).
The success of Intel’s value chain can be judged by the fact that it helped the company earn revenues of US$30. 1 Billion in 2003. The company has over 78,000 employees worldwide, with 294 offices and facilities for its 450 odd products. Intel was ranked 53 in the list of Fortune500 companies in 2003. By converting from its EDI systems to one using its RosettaNet business process standards with XML forms, Intel is expected to make further giant strides in the way it does business. (1) Spectrum Pharmaceutical
Porter’s five force analysis is used to analyze Spectrum Pharmaceutical in the pharmaceutical industry. Porter’s five forces analysis is a method of analyzing an industry and a company’s business strategy. It uses five fundamental forces that determine competition within an industry and how a company functions within that industry. These five forces involve market forces and pricing power of the business, suppliers and customers. The first force that a company must deal with is the bargaining power of customers. In relation to Spectrum Pharmaceutical, the customers have very little power to bargain prices with the company.
The products that Spectrum provides are unique niche products that the customer cannot obtain anywhere else. This gives the customers little bargaining power with the company. This makes the products that Spectrum produces more profitable for the company, but more expensive to the customer. This makes the products more expensive however, which makes them more profitable for the company. There are few substitutes for these products, which reduces the buyers leverage to negotiate lower prices. The buyers have little concentration which reduces their ability to negotiate lower prices.
Due to lack of alternative products there are few substitutes for Spectrum’s products. All these reasons combined together give the buyer of the products little force to negotiate lower prices, but give the company a lot of power to maintain their high prices. The second force in the analysis is the bargaining power of suppliers. In this instance, the suppliers to Spectrum have little power to affect the price of the final product. There are several different firms that can supply Spectrum with the necessary products for spectrum to manufacture their products.
This gives the suppliers little leverage to boost prices to Spectrum, which in turn helps to keep the price of supplies low. There are usually several alternative products on the market that Spectrum can use to manufacture the necessary goods. Due to the lack of concentration of suppliers, they have little leverage to negotiate higher prices which would squeeze the profits of Spectrum. In addition, the cost of inputs in the price of Spectrum’s products is very low compared to the final cost of the product. The regulatory process is a much more expensive input to the final cost of goods than the raw material inputs.
All these reasons combined give suppliers little force to raise prices to Spectrum, and have little influence on the price to the consumer. The next force in the analysis is the threat of substitute products. Several different substitute products allow the consumer to switch to other products and lower price products. This price elasticity keeps prices lower for the consumer and limits the ability of the company to raise prices. There are few substitute products for drugs that Spectrum manufactures. Consumers have little alternative choices for Spectrum products.
This reduces the ability of the consumer switch to lower cost products. This keeps the product prices high and reduces the leverage of the consumer has to keep prices lower. All these reasons combined, keep reduce the force of the consumer to exert little ability to keep prices low and allow Spectrum to charge higher prices for its products. The next force in the analysis is the threat of new entrants into the market. If it was easy to enter the market with new and competing products, the ability to keep prices high would be reduced.
This however, is not the case with Spectrum. It is extremely expensive for new entrants to get into the pharmaceutical market. It is costly in both money and time to get new drugs to market. The regulatory process insures that new products to the market have been tested at several levels. This testing is expensive in time, money and expertise. It takes several years to get new products through the regulatory process and new products to market. This high cost limits the number of new entrants into the market. There are many barriers to entry into the market.
In addition, Spectrum holds patents that limit market competition for several years. Even though the pharmaceutical business is highly profitable, there are few competitors in the marketplace due to the high entrance costs and other barriers. The capital costs to enter the marketplace limit the number of competitors in the marketplace. The high capital, labor and other costs limit the force of new entrants to compete against Spectrum in the marketplace. The barriers to entering the pharmaceutical business limit competition and ensure that drug companies can maintain higher prices.
The last force in the analysis is the intensity of competitive rivalries. Industry rivalries can increase the competition for the consumer’s money. This can keep costs down and reduce profitability. Even though there are several companies in the pharmaceutical business, the total business is extremely large. The high costs of entering the market reduce competition. The high capital costs, the regulatory process and the barriers to entry, reduce competitive rivalries within the industry. The industry has a high growth rate, especially as the older population grows.
In most cases there is little over production and over capacity. It takes a lot of technical expertise in many different areas to get into the pharmaceutical business. There are advertising campaigns in the few areas where there are substitute products, but this mostly limits the size of the market and not profitability. Due to the extremely high profits, most companies have a strong incentive to innovate, market and remain in the business. All these reasons combined limit the competitive rivalry that would reduce the profitability of firms in the pharmaceutical industry.
In summary, the Porter’s five force analysis of Spectrum Pharmaceutical show few limits on its ability to compete. Customer’s have little ability to bargain lower prices with the firm. Suppliers to Spectrum have little ability to raise prices to the company and have little influence on the cost structure of the final product. There are few substitute products to the drugs that Spectrum produces, this reduces the ability of consumers to switch to alternative lower price products, and ensures the ability of Spectrum to keep prices high.
The high capital costs and the regulatory rocess restrict the number of new competitors in the pharmaceutical industry. This reduces competition for companies in the drug business and helps to reduce completion and keep prices high. The last force in the analysis is threat of competitive rivalries. This is relatively low for Spectrum. The high capital costs to enter the business and the barriers to entry into the market help keep competitive rivalries low. Due to the size of the industry and few competitors that can overcome the entrance barriers, limit the rivalry and allow the industry to by highly profitable.