The Business Book

(Joyce) #1


Benetton’s value chain boosts
its differentiation advantage.
Clothes can be dyed in fashionable
colors to match customer taste.

See also: Leading the market 166–69 ■ Porter’s generic strategies 178–83 ■
Good and bad strategy 184–85 ■ Porter’s five forces 212–15


advantage. Porter identified a set
of activities that businesses can use
to better understand how to achieve
these forms of differentiation. These
interrelated activities—dubbed the
“value chain” by Porter—describe
the flow of a product from its initial
supply to the final customer.
A company can add value to the
product at each stage of the chain,
through product-related activities—
its inbound logistics (supply of parts
or materials), manufacturing, and
after-sales service—and market-
related activities: outbound
logistics (the delivery of products
to the end user), and marketing
and selling the product.

Gaining the advantage
To achieve competitive advantage,
a company cannot focus on one
activity alone, but needs to
consider each of the activities in
the chain. For example, Mercedes-
Benz pursues a differentiation
strategy, first through producing a
high-end product, but also through
providing outstanding after-sales
service. Analyzing the value chain
can also help companies to identify
what areas of their business might
be suitable for outsourcing, which
can help the company to achieve
a cost advantage.
Primary value-chain activities in
a company are supported by a series
of secondary activities, which can
also be used to achieve competitive
advantage. These activities vary
by industry, but typically include:
purchasing (procurement); human
resource (HR) management;
technology development, including
research and development (R&D);
and infrastructure functions, such
as finance and legal. Although
support activities may be viewed

as “overheads,” secondary value
can be generated, for example,
through better use of technology.
In addition to their horizontal
activities, companies operate in a
“value system” of vertical activities,
such as a manufacturer who buys
parts from suppliers and outsources
its distribution. Competitive
advantage relies not only on the
company’s value chain, but on the
value system of which it is a part.

Reinventing value
Porter’s theories on competitive
advantage were highly influential,
and have been built upon by other
business theorists. Management
scholars Richard Norman and Rafael
Ramirez argued in 1993 that the
market complexity of the 1990s
required companies to “reinvent”
the notion of value beyond the linear
thinking of the “chain.” In 1995,
US executives Jeffrey Rayport and
John Sviokla drew parallels with
the emerging world of the Internet,
suggesting that value could be
added to online activities and
products in a “virtual” value chain. ■

Red, yellow, or purple?

Fashion retailer Benetton,
launched by the Benetton
family in Italy in the 1960s,
pursues a differentiation
strategy with its bold brand
image. To achieve this, the
company has focused on every
aspect of its value chain, from
supply to satisfying the latest
consumer fashions. To ensure
Benetton garments are
up-to-the-minute, the company
manufactures many of its
clothes in gray, then dyes
them to meet the demand for
whatever colors are in fashion.
Although this is costly in
production, it minimizes stock,
reduces wastage, and enables
the company to respond
quickly to changing consumer
tastes. Benetton stores are run
by agents, and garments are
shipped directly to the stores
and immediately placed on the
shelves. This creates a strong
value system, keeps costs
lower, and allows each part of
the chain to absorb fluctuations
in demand. Benetton has more
than 6,500 stores in more than
120 countries, and its turnover
exceeds $3.2 (€2) billion a year.

When you’ve got only
single-digit market share—
and you’re competing with
the big boys—you either
differentiate or die.
Michael Dell
US founder of Dell Computers (1965 –)
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