E-commerce is simply understood as the buying and selling of goods and services over the internet, however, ecommerce transactions primarily occur among consumers, businesses, and government.
With the increase of ecommerce activities and the growth of support services providers in Nigeria, it is critical to sound the alarm on time, that paying adequate attention to how the ecommerce value-chain works will go a long way in building a more robust and sustainable ecosystem of operators and prevent an implosion of the subsector in the near future.
A value chain is a business model that describes the full range of activities needed to create a product or service, which must be periodically analysed to help increase production efficiency so that a company can deliver maximum value for the least possible cost.
The concept was conceived in 1985 by Harvard Business School Professor Michael Porter in his book The Competitive Advantage: Creating and Sustaining Superior Performance. In it, Porter wrote: “Competitive advantage cannot be understood by looking at a firm as a whole. It stems from the many discrete activities a firm performs in designing, producing, marketing, delivering, and supporting its product.”
According to Porter’s definition of value chains, all of the activities that make up a company’s value chain can be divided into two categories that contribute to its bottom line: primary activities and support activities.
Primary Activities
These contribute to the creation of a product or the delivery of a service, such as: Inbound logistics – Activities related to receiving, warehousing, and inventory management of source materials and components; Operations – Activities related to turning raw materials and components into a finished product; Outbound logistics- Activities related to distribution, including packaging, sorting, and shipping; Marketing and sales- Activities related to the marketing and sale of a product or service, including promotion, advertising, and pricing strategy and lastly, after-sales services- Activities that take place after a sale has been finalized, including installation, training, quality assurance, repair, and customer service.
Secondary Activities
These make primary activities more efficient in order to create a competitive advantage. They include: Procurement- Activities related to the sourcing of raw materials, components, equipment, and services; Technological development- Activities related to research and development, including product design, market research, and process development; Human resources management-Activities related to the recruitment, hiring, training, development, retention, and compensation of employees and lastly infrastructure- Activities related to the company’s overhead and management, including financing and planning.
Like all things in business, value chains are constantly evolving. When the concept was first introduced, before the dawn of the internet, it related to brick-and-mortar business only and was pretty straightforward: A product was made in a factory, transported to a retail store, and then purchased by a customer.
The internet changed all that. Today, products are generally shipped to a warehouse or fulfilment centre instead of a physical retail store. The customer purchased the product from an eCommerce seller, and it is shipped from the warehouse or fulfilment centre.
To understand where improvements can be made to grow competitive advantage and customer value, companies need to conduct a value chain analysis – which is an evaluation of each activity that contributed to a company’s value chain. This allows business leaders to see how each step in the chain adds or subtracts value from the final product or service.
For example, an ecommerce value chain analysis may determine that activities can be made more efficient, reducing costs; or, if could identify ways to improve product design, increasing product differentiation. Typically, increasing the performance of one of the four secondary activities can benefit at least one of the primary activities.
There are three steps involved in conducting a value chain analysis.
Identify value chain activities: this first step involves gaining an understanding of all primary and secondary activities that go into the creating of a product or service. For companies that sell multiple products or services, it’s important to conduct a value chain analysis for each one of them as the touchpoints may be different.
Determine the cost and value of activities: each identified activity adds to the value chain process. It’s also important to look at the costs involved with each activity, as lowering them could improve the value of each transaction.
Determine opportunities for competitive advantage; once you understand your value chain and the cost and value associated with each step, you can analyse it through the lens of whatever competitive advantage you’re trying to achieve.
While the best time to initiate a value-chain analysis remains at the onset of a business, but if you didn’t, it is yet early to begin now.
