Business Strategy: Value Chain, Five Forces & E-commerce
What Is Porter’s Value Chain Model?
It is a strategic business tool introduced by Michael Porter.
It helps a company analyze its internal activities to see how it creates value for its customers.
The “value” is the amount customers are willing to pay for a product or service.
The goal is to identify activities where the company can reduce costs or add more value (differentiation) to gain a competitive advantage.
The model splits a company’s activities into two categories: Primary Activities and Support Activities.
Primary Activities
These are the five main activities directly involved in the physical creation, sale, maintenance, and support of a product.
Inbound Logistics:
All activities related to receiving, storing, and managing raw materials and inputs.
Operations:
All activities that transform the raw materials (inputs) into the final product (output).
Outbound Logistics:
All activities that collect, store, and distribute the finished product to the customer.
Marketing and Sales:
All activities that persuade customers to buy the product.
Service:
All activities that maintain and enhance the product’s value after it has been sold.
Support Activities
These are the four activities that support or provide the backbone for the primary activities to function efficiently.
Procurement:
This is the function of purchasing the inputs used in the entire value chain (not just raw materials).
Technology Development:
This involves all R&D (Research & Development) and IT (Information Technology) activities.
Human Resource (HR) Management:
This includes all activities related to recruiting, hiring, training, developing, and compensating employees.
Firm Infrastructure:
This is the company’s support system that serves the entire business.
Porter’s Five Forces Model
Definition: It is a strategic framework developed by Michael Porter.
The Five Forces Explained
1. Threat of New Entrants
This force examines how easy or difficult it is for new competitors to enter the market.
High Threat (Bad for industry): Occurs when barriers to entry are low.
Examples: Low start-up costs, no strong brands, few regulations (e.g., starting a new café).
Low Threat (Good for industry): Occurs when barriers to entry are high.
Examples: High investment needed (e.g., building a car factory), strong patents, strong brand loyalty (e.g., competing with Google).
2. Bargaining Power of Buyers
This force looks at how much power customers (buyers) have to demand lower prices or higher quality.
High Buyer Power (Bad for industry): Buyers are strong when:
They are few in number but buy in large volumes (e.g., a supermarket chain buying from a small farm).
Low Buyer Power (Good for industry): Buyers are weak when:
There are many individual customers.
The product is highly unique or specialized.
3. Bargaining Power of Suppliers
This force looks at how much power a company’s suppliers have to increase their prices or reduce quality.
High Supplier Power (Bad for industry): Suppliers are strong when:
There are very few suppliers to choose from (e.g., Microsoft for PC operating systems).
Low Supplier Power (Good for industry): Suppliers are weak when:
There are many suppliers offering the same item (e.g., suppliers of standard screws).
4. Threat of Substitute Products or Services
This force examines the likelihood of customers finding a different way to meet their needs.
High Threat (Bad for industry): The threat is high when:
The substitute offers a better price-performance value.
Low Threat (Good for industry): The threat is low when:
There are no good or cheap alternatives.
5. Rivalry Among Existing Competitors
This force looks at the intensity of competition between the companies already in the industry.
High Rivalry (Bad for industry): Competition is intense when:
There are many competitors of roughly equal size.
Low Rivalry (Good for industry): Competition is low when:
There are few competitors (an oligopoly or monopoly).
The industry is growing fast.
What Is E-commerce?
Simple Definition: E-commerce (electronic commerce) is the process of buying and selling goods or services using the internet.
Core Function: It involves the transfer of money and data to complete these transactions online.
Key Components: It relies on technologies like websites, mobile apps, online payment gateways, and inventory management systems.
Common Examples: This includes everything from online shopping (like on Amazon or Flipkart) and booking tickets to digital payments and internet banking.
Scope Based on Business Activities
E-commerce is not just the final sale; it includes the entire business process:
Online Sales: Selling physical goods (electronics, clothes) and digital goods (e-books, software, music).
Digital Marketing: Using the internet to advertise and promote products (e.g., social media ads, email marketing, SEO).
Online Payments: Facilitating transactions through digital wallets (Paytm), credit/debit cards, UPI, and net banking.
Supply Chain Management: Managing the flow of goods from the supplier to the warehouse to the customer, all tracked digitally.
Customer Relationship Management (CRM): Providing customer service and support through online channels like chatbots, email, and social media.
Scope Based on Sectors
E-commerce has entered almost every major industry:
E-tail (Retail): Online stores selling all kinds of physical products.
Finance: Internet banking, online insurance, and digital investment platforms.
Travel & Tourism: Online booking of flights, hotels, and holiday packages.
Entertainment: Streaming services for music and movies (e.g., Netflix, Spotify).
Education (Ed-Tech): Online courses, tutoring, and e-learning platforms.
Healthcare: Online pharmacies and telehealth consultations.
What Is a Trade Cycle?
Simple Definition: A trade cycle (also known as a business cycle) refers to the regular ups and downs (or fluctuations) in the overall economic activity of a country.
Phases of a Trade Cycle
A typical trade cycle has four distinct phases:
1. Expansion (or Boom)
This is the phase of economic growth and prosperity.
Economic Activity: Production of goods and services is at its highest level.
Employment: Job opportunities are high, and unemployment is very low.
2. Peak
This is the upper turning point of the trade cycle, where expansion ends.
Economic Activity: The economy reaches its maximum growth point.
Saturation: Production, employment, and prices are at their highest levels.
3. Contraction (or Recession)
This is the phase where economic activity starts to decline.
Economic Activity: Production of goods and services begins to fall.
Employment: Businesses start laying off workers, so unemployment rises.
4. Trough (or Depression)
This is the lowest point of the trade cycle, where contraction ends.
Economic Activity: The economy hits rock bottom. Production and employment are at their lowest levels.
Idle Resources: Many factories are idle, and unemployment is very high.
| Feature | Value Chain | Supply Chain |
| Simple Definition | A set of internal activities a company performs to create a product or service. | A network of all organizations and resources used to move a product to the customer. |
| Main Goal | To add value at each step and gain a competitive advantage. | To achieve efficiency, speed, and cost-effectiveness in production and delivery. |
| Focus | Internal & Strategic. (How can we be more profitable or unique?) | External & Operational. (How can we get materials/products from A to B?) |
| Example Activities | R&D, Operations, Marketing & Sales, Customer Service, HR, Technology. | Sourcing, Manufacturing, Logistics, Transportation, Warehousing, Distribution. |
| Key Relationship | The Supply Chain (logistics) is one part of the broader Value Chain. | The Supply Chain is a component within the Value Chain. |
What Is EDI (Electronic Data Interchange)?
Definition: EDI stands for Electronic Data Interchange. It is a technology that allows two or more companies to exchange business documents directly between their computer systems in a standard electronic format.
Main Purpose: It replaces traditional paper-based documents (like mail or faxes) and manual data entry (like emails with attachments).
Documents Exchanged: Common documents include:
Purchase Orders (POs)
Invoices
Shipping Notices
Inventory Updates
How It Works:
The sender’s computer system generates a document (e.g., a purchase order).
This document is automatically translated into a standard EDI format (like ANSI X12 or EDIFACT).
The file is sent to the trading partner over a secure network.
The receiver’s computer system translates the standard format back into an internal document that their system can understand.
Key Benefits:
Speed: Transactions are sent and received in minutes, not days.
Accuracy: It eliminates manual data entry, which significantly reduces human errors.
Cost Savings: It saves money on paper, printing, postage, and staff time.
Efficiency: It automates and speeds up the entire business cycle (e.g., order-to-payment).
What Is Porter’s Five Forces Model?
It is a strategic framework created by Michael E. Porter.
Its main purpose is to analyze the level of competition within a specific industry.
By understanding these forces, a business can judge an industry’s attractiveness (how easy it is to make a profit) and develop a strategy to be more competitive.
The Five Forces
Here are the five forces that shape industry competition:
1. Threat of New Entrants
This force examines how easy or difficult it is for a new competitor to enter the market.
High Threat (Bad for industry profitability): This happens when barriers to entry are low.
It costs very little money to start.
There are no strong, established brands.
Low Threat (Good for existing companies): This happens when barriers to entry are high.
It requires huge investment (e.g., building a car factory).
Existing companies have strong brand loyalty (e.g., Apple).
2. Bargaining Power of Suppliers
This force looks at how much power a company’s suppliers have to increase their prices or reduce the quality of their goods.
High Supplier Power (Bad for industry): Suppliers are strong when:
There are few suppliers to choose from (e.g., only one or two companies make a critical computer chip).
The cost of switching suppliers is very high.
Low Supplier Power (Good for industry): Suppliers are weak when:
There are many suppliers offering the same (standardized) product.
It is easy and cheap to switch to a different supplier.
3. Bargaining Power of Buyers
This force looks at how much power customers (buyers) have to demand lower prices or higher quality.
High Buyer Power (Bad for industry): Buyers are strong when:
There are few, large buyers (e.g., a defense company selling jets only to the government).
The products are standardized (not unique), so buyers can easily find an alternative.
Low Buyer Power (Good for industry): Buyers are weak when:
There are many individual customers.
The product is highly differentiated or has a strong brand.
4. Threat of Substitute Products or Services
This force examines the likelihood of customers finding a different way to do what your product does.
Example: Videoconferencing (Zoom) is a substitute for business travel (airlines). A train is a substitute for a car.
High Threat (Bad for industry): The threat is high when:
The substitute offers a better price-performance trade-off.
The cost of switching to the substitute is low.
Low Threat (Good for industry): The threat is low when:
The substitute is expensive or lower quality.
The customer is very loyal to the original product.
5. Rivalry Among Existing Competitors
This force looks at the intensity of competition between the companies already in the industry.
High Rivalry (Bad for industry): Competition is intense when:
There are many competitors of roughly equal size.
The industry is growing slowly (companies must steal customers from each other to grow).
Low Rivalry (Good for industry): Competition is low when:
There are few competitors (an oligopoly or monopoly).
The industry is growing fast.