The vAlue ChAIn

All of the functions of a company—such as production, marketing, product development,

service, information systems, materials management, and human resources—have a role

in lowering the cost structure and increasing the perceived value of products through dif-

ferentiation. As the first step in examining this concept, consider the value chain, which

is illustrated in Figure 3.5.11 The term value chain refers to the idea that a company is

a chain of activities that transforms inputs into outputs that customers value. The trans-

formation process involves both primary activities and support activities that add value

to the product.

Primary Activities

Primary activities include the design, creation, and delivery of the product, the product’s

marketing, and its support and after-sales service. In the value chain illustrated in Figure 3.5,

the primary activities are broken down into four functions: research and development,

production, marketing and sales, and customer service.

value chain

The idea that a company

is a chain of activities

that transforms inputs into

outputs that customers

value.

Figure 3.5

The Value Chain

Materials

management

Company infrastructure

Information

systems
Human

resources

Primary Activities

Support Activities

R&D

Production

Marketing

and sales

Customer

service

primary activities

Activities related to the

design, creation, and

delivery of the product,

its marketing, and its

support and after-sales

service.

© Cengage Learning

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Part 2 The Nature of Competitive Advantage

Research and Development Research and development (R&D) refers to the design of

products and production processes. Although we think of R&D as being associated with

the design of physical products and production processes in manufacturing enterprises,

many service companies also undertake R&D. For example, banks compete with each

other by developing new financial products and new ways of delivering those products to

customers. Online banking and smart debit cards are two examples of the fruits of new-

product development in the banking industry. Earlier examples of innovation in the bank-
ing industry included ATM machines, credit cards, and debit cards.

By creating superior product design, R&D can increase the functionality of prod-

ucts, making them more attractive to customers, and thereby adding value. Alternatively,

the work of R&D may result in more efficient production processes, thereby lowering

production costs. Either way, the R&D function can help to lower costs or raise the utility

of a product and permit a company to charge higher prices. At Intel, for example, R&D

creates value by developing ever more powerful microprocessors and helping to pioneer

ever-more-efficient manufacturing processes (in conjunction with equipment suppliers).

It is important to emphasize that R&D is not just about enhancing the features and

functions of a product, it is also about the elegance of a product’s design, which can create

an impression of superior value in the minds of consumers. For example, part of Apple’s

success with the iPhone has been based upon the elegance and appeal of the iPhone design,

which has turned a piece of electronic equipment into a fashion accessory. For another ex-

ample of how design elegance can create value, see Strategy in Action 3.1, which discusses

value creation at the fashion house Burberry.

Production Production refers to the creation process of a good or service. For physical

products, this generally means manufacturing. For services such as banking or retail

operations, “production” typically takes place while the service is delivered to the cus-

tomer, as when a bank makes a loan to a customer. By performing its activities efficiently,

the production function of a company helps to lower its cost structure. For example, the

efficient production operations of Honda and Toyota help those automobile companies

achieve higher profitability relative to competitors such as General Motors. The produc-

tion function can also perform its activities in a way that is consistent with high product

quality, which leads to differentiation (and higher value) and lower costs.

Marketing and Sales There are several ways in which the marketing and sales func-

tions of a company can help to create value. Through brand positioning and advertising,

the marketing function can increase the value that customers perceive to be contained in a
company’s product (and thus the utility they attribute to the product). Insofar as these help

to create a favorable impression of the company’s product in the minds of customers, they

increase utility. For example, the French company Perrier persuaded U.S. customers that

slightly carbonated bottled water was worth $1.50 per bottle rather than a price closer to

the $0.50 that it cost to collect, bottle, and distribute the water. Perrier’s marketing function

increased the perception of value that customers ascribed to the product. Similarly, by help-

ing to re-brand the company and its product offering, the marketing department at Burberry

helped to create value (see Strategy in Action 3.1). Marketing and sales can also create

value by discovering customer needs and communicating them back to the R&D function

of the company, which can then design products that better match those needs.

Customer Service The role of the service function of an enterprise is to provide after-

sales service and support. This function can create superior utility by solving customer