Re-modelling the value chain

The stages of the value chain determine the individual components of
the total framework from the source (raw materials) to the final
destination (the end customer). These stages were once a fixed set of
activities and were based on the old industrial model. Michael
Porter's strategy is indeed obsolete now, but we cannot discount the
kind of insight his concepts provide in comprehending the modern
aspects of the value chain.

I've been reading an HBR article and was quite mesmerized by some of
the derivatives of the value chain concept, and how Ikea, the
furniture and home décor supplier banked on its concept of reinventing
the activities of their value chain.

The authors (Richard Normann & Rafael Ramirez) of this article have
done a great job of highlighting this aspect of strategy.

The opening line mentions in capitals that STRATEGY IS THE ART OF
CREATING VALUE. Undoubtedly, this is true from the Porter's times. But
whats different now is that this value needs to be reinvented to match
the current scenario. The value chain concept mirrored the assembly
line view of making a product for the end customer. Globalisaton,
emerging markets, rapidly developing technologies and (of course)
competition compels head offices to relook their value chain from time
to time.

As an illustration, the article talks about the worldwide leader in
home furniture décor company IKEA, which used innovative practices to
transform itself from a small Swedish mail order furniture operation
to the world's largest retailer of home furnishings.

The basic business aspects of IKEA have remained the same. Simple,
high quality Scandinavian design, global sourcing of components, knock
down furniture kits that customers can assemble themselves, and
creating an experience called IKEA. All of these were innovative at
the time the company started, and its efficient logistics leads to
lower costs, and thereby directly expanding its bottomline.

IKEA has a strong relationship with its customers. In fact, it has
added its customers in its existing value chain in return for lower
prices. Instead of the company assembling the components, the
customers can do so (and willingly), and thereby pay lower prices.
IKEA prints more than 45million catalogues every year in 10 different
languages. The company's stores feature free strollers, supervised
child care, playgrounds for children, wheelchair for adults and all
that one would have for the so called experience.

The differentiating concept of IKEA is that it believes that their
customers' role is not just to consume value, but to create it. IKEA
is more than a link on a value chain. It is the center of
constellation of services, goods and design.

So is the case of banks that moved to the concept of ATMs. From being
a pure play service provider, banks have moved to more innovative
techniques, thanks to the underlying technology. Having self operated
ATMs relieves the banks of paying cash by the clerk. Things have
certainly changed with increasing competition, no bank can now survive
that does not provide such facilities.

IKEA has redefined the value chain to move towards a better match
between its competencies and its customers. This is the kind of
integration that all companies in probably every sector should be
aiming for.