Sunday, August 4, 2013

Move up the Business Value Chain? Or Create the most Value in the Chain?

Several companies who compete on cost are tired of it. Hence, they strive to move up the business value chain with an aim to differentiate themselves from competition and improve their margins. This is evident across industry sectors. Several IT companies who compete on cost for back-end subcontracted work are trying to build capabilities up the value chain like Enterprise and Management consulting. Manufacturing companies as well are looking for ways to build high-value products rather than being suppliers for it. The encouragement for moving up the business value chain also comes from Govt. industry and trade bodies.

Is moving up the value chain the only way out from fighting on cost? Or is there an alternate way where you can add much value in the chain without changing your position? Consider aviation industry for example. Fuel savings have become a much important lever for airlines to make profits and stay in business. And who contributes the maximum to fuel savings today? Its not the aircraft manufacturers, but the engine suppliers. Most of the increase in fuel efficiency in recent times is attributed to technology advances in engines. Hence, engine suppliers are contributing much value in aviation value chain without changing their position in it. Needless to say, it does increase their bargaining power.

Even in other industries its not very difficult to see whereby players in middle of the chain can add value. For instance, in Automotive, as the whole industry move towards electric cars, the battery suppliers will have the opportunity to play the most value adding role by providing batteries with high energy density and other important characteristics.

Opportunities can also be created rather than waiting for market conditions to create them. For instance, engineering suppliers can seek to be more than a subcontractor for low-end engineering work. They can provide niche skills and rapid prototyping capabilities which can be leveraged by their customers to try out new ideas and innovate. By doing so, they can also benefit by being part of growing Open Innovation trend.

Hence, the opportunities to escape the price-war and provide differentiated offerings may not be that far up in the value chain.

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