Chapter 2
The Internet Value Chain
Learning Objectives:
By the time students complete this chapter they should be able to:
• Distinguish between the following concepts: supply chain, value chain, and virtual value
chain.
• Explain lean processes and greening the supply chain.
• List the business processes that are necessary to manage the supply chain.
Chapter Perspective
Students need to recognize from the get-go that Internet marketing is much more than cool
websites and interactive advertising. Perhaps that is the reason that reviewers of the first edition
insisted that this chapter be near the beginning. It forms the basis of a solid understanding of the
transformational change being created throughout the economy by the Internet. It also puts a
The Transformation of Herman Miller
The intent of this extended example is to draw students into a subject matter that may be
unfamiliar to them and that they may have a tendency to consider theoretical and boring. The
example is intended to show its relevance and to be lively enough to show that it is also
interesting. Herman Miller has a good website, but supply chain issues are hard to see on a site. .
If you want another example, students always seem to like automobiles.
The replacement is “lean thinking,” and their model is Toyota, both issues that are likely to be
familiar to you, and hopefully to your students, from an operations course. Six Sigma and
continuous improvement are also concepts that should be familiar and that are worth noting.
Strategic Value Chain Concepts
Students may recognize concepts in this section that are borrowed or adapted from strategy
material; if so, they are entirely correct. Relating this material to Porter’s basic strategy rubric is
worthwhile. It is even more important for students to realize that both supply chains and
channels of distributions are not new ideas. The issue is end-to-end integration, from earliest
The concept of outcomes-driven supply chains (Melnyk et al., Sloan Management Review,
Winter, 2010) is timely and relevant. They identify successful outcomes as:
• Cost: minimize cost while ensuring customer service
Notice that greening of the supply chain is such an important issue at present that it is included as
one of their successful outcomes. The trick is in successfully balancing all six outcomes. The
The core supply chain management processes (Table 2.1) are important but dry. Students should
realize that they are empirically-based, the result of an extensive piece of research. Good
examples would make this section more interesting, but they are hard to come by because they
are very specific and not part of the mainstream marketing literature.
The Zara example engages students. Some of your students are likely to have shopped at Zara
and may have interesting customer experiences to recount. Their interaction with customers is
The “Jenga” supply chain model of Bain identifies four key factors in creating a cost-effective
integrated value chain:
• Information search costs
• Standardization of products
The section on the Dell Direct Model (notice that it is still direct but no longer build-to-order)
has been shortened with an attempt to retain all the relevant points. The “Jenga” graphic (Figure
2.5) shows how many activities (how much friction) have been cut out of Dell’s chain. Dell, like
Herman Miller, has been working on its value chain for many years. The time and effort it takes
to create an integrated value chain is the reason that it becomes a sustainable competitive
advantage.
At the same time Dell took a PR black eye when it ignored the customer service complaints of
The three concepts used to describe the creation of a virtual value chain are:
1. Visibility—information systems that let managers know what is going on in the supply
chain at all times. We will return to this topic at the end of the chapter with the
Both the FedEx and the Frito-Lay examples have been updated, although there were not many
major developments since the 2nd edition. Was that because both had developed a smoothly-
functioning supply chain and now can concentrate on creating customer value?
The listing of the benefits of an integrated value chain lead into the discussion of Vargo and
Lusch’s service-centered dominant logic. Are all goods essentially services? That’s easy for
some of us to accept; perhaps unacceptable to others. The propositions listed in the chapter seem
unarguable to marketers and some of them represent issues that will be discussed in chapters to
come. They are:
• Goods are distribution mechanisms for service provision
The chart in Figure 2.8 continues to make the argument that integrated supply chains have been
achieved in many enterprises with the emphasis shifting from costs and inventory levels to
customer service, speed to market and greening the supply chain.
EDI, ERP, and Web Services
Students need to understand this material, although it is by no means glamorous. You might,
however, be able to get someone from IT at your school or a local company to talk about an
EDI is the process that predates the Internet. You may remember the old cases and articles from
HBS and HBR that describe the American Hospital Supply and McKesson systems and the
ERP is the activity that took center stage at institutions of higher education and corporations. If
ERP is currently underway at your school, one of the consultants may be another possibility as a
guest speaker.
Web Services is the activity that is most relevant to many marketing issues—and also the worst
named. Wikipedia has a lengthy article with more technical data than you probably want. They
have an interesting list of Web Services providers. In addition to Amazon, eBay and Google,
Cloud services is clearly the development de jour. It is also clearly best referred to as Software as
a Service (SaaS). That explains what is going on in a way that Web Services has never done.
eBay is the main illustration in this section and they do as good a job of explaining it as anyone.
The RFID Future Slides 21 – 23
RFID technology, as pointed out in the text, is not new technology. It is, however, only recently
The Benefits of Business Integration Slide 24
The last section summarizes the benefits of business, and therefore supply chain, integration.
Sometimes referred to as the 4 Vs of business transformation, they are:
1. Velocity—goes back to speed as a strategic driver
Discussion Questions
1. Differentiate between three key concepts: supply chain, value chain, and integrated
value chain.
• Supply Chain. All the efforts to plan, produce and deliver products from raw materials to
finished product.
2. Marketing has three core processes: one of which is supply facing, one of which is
essentially internal, and one of which is customer facing. Do you agree with this
statement? Be prepared to explain why or why not.
This question is based on Figure 2.3 and the accompanying text. It lists the three processes as
supply chain management, product development and management, and customer relationship
3. What are the business outcomes that are the result of a successful supply chain?
A supply chain has become more than a place where costs must be balanced against
customer service, although that is still the first issue as listed in the text:
• Cost: minimize cost while ensuring customer service
4. Do you agree with the concept that all goods are essentially services? Why or why not?
One way of looking at this is that advertisers have always known they must sell product benefits,
5. What are the business practices used by Zara that have made it responsive to customer
needs and successful financially?
The principle here is the same as it is for Dell. There are customer-facing practices that are
visible and appealing—in the case of Dell, the direct model. As much or more of its success,
however, can be attributed to supply chain integration and efficiencies, which are less visible to
most students.
6. What stages is an enterprise likely to go through en route to a virtual value chain?
Answering this question requires an understanding of Figure 2.7, Creating a Virtual Value Chain.
The first stage is visibility, in which information systems are created that allow participants to
7. Discuss integrative elements Dell has employed on (a) the supply side and (b) the
customer side.
Supply side elements include:
• A small number of trusted suppliers
Customer-side elements include:
• Direct sales to customers by means of telephone and the Internet (small businesses and
8. How does the combined use of EDI and ERP facilitate the development of an integrated
value chain?
EDI is a facilitator of transactions between customers and vendors in the supply chain. ERP is
the integration of separate systems within the enterprise.
9. What potential advantages does Web Services have to offer over EDI and ERP?
Web Services provides a way to transact over the common platform of the Internet without a
great deal of specialized hardware and software. It has the potential, therefore, to be much
10. What is meant by Web Services? Cloud computing?
Web Services provides a way to transact over the common platform of the Internet without a
great deal of specialized hardware and software. In its original manifestation Web Services
11. What is RFID technology? In what ways can it improve supply chain functioning?
RFID technology is based on a tag, essentially a chip with a tiny antenna. The chip is able to
store product code data that has more detail than the currently-ubiquitous bar code. Information
12. What are the four benefits of business integration?
The benefits are listed as:
• Volume
Internet Exercises
The Internet Career Builder Exercise is not included in this chapter because the jobs are mostly
in logistics or operations, not marketing per se.
1. Select an industry (e.g., automotive) or a specific company (e.g., Ford) or even better a
pspecific product model (e.g., Ford Focus) and identify elements of its value chain.
Where can information be used to decrease costs or increase customer satisfaction or
both?
This is an exercise that will require both some research and some thinking. It actually takes quite
a bit of research to completely document a value chain, so the words used are “elements of its
2. Think about how you bought the text and other material for this class. It might have
been at the college bookstore, at a local supplier, over the Internet, or some
combination of all three. Identify the elements of the value chain that were necessary to
get these products to you, the final customer.
This exercise brings the concept of the value chain closer to the student by using a process with
which each student can identify. The main members of the chain on the textbook side as well as
the trade book side are authors, publishers, distributors and retail or ecommerce book sellers.
3. Spend some time on the website for your school, college or department. How does that
organizational unit use its website to help students visualize institutional processes,
mirror activities carried on in the physical world, and increase the strength of
relationships with students and potential students? What more could it do in each of
these areas?
Students might look at issues like, “Can a prospective student find all the information required
and submit an application over the Internet?” or “If I want to declare a major in marketing, can I
find out all I need to know about the requirements and how to declare the major on the website?”
Is all the information there—visualization of the process from start to finish—and are all the
elements present to allow the process to be completed on the web—mirroring the physical-world
process?
Are the students satisfied with information only or do they want to be able to actually accomplish
4. Locate a news article on a marketing application of RFID technology different from
those described in the chapter. Discuss the application in class, being specific about
how it is improving a supply chain or other marketing process.
Students will probably Google this, and that’s fine. Hopefully they will come up with a variety
5. Locate a nontechnical article about Web Services in general or cloud computing
in particular and discuss the implications of this way of delivering technology.
Key Terms
channels of distribution the intermediaries through which products and information about
transactions move in the course of a single exchange.
RFID (Radio Frequency Identification) tiny silicon chips with antennae that can receive and
transmit information.
Six Sigma the quality management technique that results in near-perfect products, technically
results that fall within six standard deviations from the mean of a normal distribution.
value essentially the usefulness (economic utility) of the product less its price.
virtual value chain term given to an integrated supply chain in which all transactions are
conducted electronically.