*The art picture provided by Zenaviv project. The artist - Lee Jaworek, the art title - 'Teamwork'.
The concept of a value chain can be visualized in the context of diamond cutting—a process that transforms a rough stone into an aesthetically pleasing gem. Diamond cutting has a relatively low cost, yet adds significant value to the end-product. After a diamond is cut, it’s likely to be affixed to a metal ring, further increasing the value of the end-product. The process continues, with each step adding value. In the context of business strategy, the idea of the value chain challenges one to see organizations as a collection of processes instead of hierarchies or departments.
In this case analysis we examine important parallels between web engineering agencies and consolidated pharmaceutical companies to better understand the impact a value chain strategy can have on improving the competitiveness, if not survivability, of an organization.
Although I don’t agree with every principle Michael Porter outlines in his 1985 book, Competitive Advantage, I do find the value chain concept to be a keystone principle of competitive strategy. Porter advocates that a firm’s competitive advantage is best understood when viewing the firm as a series of value chains instead of looking at the firm as a whole. More importantly, what makes a firm competitive is its ability to identify and improve select activities that are needed to deliver the type of product customers are willing to pay for.
I would like to provide a real-world application of Porter’s value chain by applying its framework to a service company, specifically, a web engineering agency. Since the value chain definition is generally applied to companies manufacturing a physical good, a few assumptions must be made in order to apply the framework to services. In the case of a web engineering agency, the end-product is typically a purpose-built web or mobile application that performs a series of functions that are valuable to the client’s business and their customers—a combination of third-party software, new business-specific logic, and design.
Below is a list of primary activities for a web engineering agency creating a web or mobile application:
- Inbound Logistics. Research and selection of value-adding third-party software solutions and SaaS providers that may be used in a modular manner. An example would be the decision to utilize a particular content management system (CMS), such as WordPress, instead of creating a system from scratch. This process is commonly referred to as component-based software engineering, or CBSE.
- Operations. Development of the business-specific functionality, leveraging the third-party software components. This is the process that traditionally comes to mind when picturing what a web agency does—programmers, copywriters, and designers will create client-specific functionality, content, and branding.
- Outbound Logistics. Storage and safeguarding of the client’s codebase and other intellectual property; the mechanisms for handing over, or deploying, new functionality and the end-product to a web hosting service provider such as AWS, or a mobile app store such as Google Play. This process is known as Continuous Integration, or CI.
- Marketing & Sales. Educating current and future clients on the benefits of the agency’s expertise, as well as consulting with the client about the impact that additional functionality will have on accomplishing their business objectives.
- Service. Monitoring performance of the client’s web and mobile applications, analyzing end-user habits, and tracking bugs while providing the client with insights, allowing them to make decisions. If the web engineering agency also provides web hosting, then the reliability and performance of the web hosting services would reflected here.
Although people have been writing code for decades, it has only recently become feasible to combine and integrate third-party functionality into new end-products, at scale. This is mostly due to the rise of code-sharing services such as GitHub and package-management services such as NPM, which allow the software development process to resemble a global value chain. The global value chain is a consolidation of cross-organizational value chains into a single process. A practical example from the software industry would be a third-party software company that develops and sells a component needed to render a mortgage calculator within a web or mobile application. The calculator has some value as a standalone tool, but provides much greater value for the end-user, and therefore the client, when displayed as part of a real estate website along with listings available on the market.
We will now draw an interesting parallel between the the web engineering industry and the pharmaceutical industry, which went through a strikingly similar value-chain-breaking transformation approximately twenty years ago. Many organizations that were set in their ways perished, while well-managed companies, such as Orchid Chemicals & Pharmaceuticals, were able to anticipate the industry changes and leverage their keen understanding of market shifts to position themselves strategically in the market by redefining their value chains.
First, a quick primer on the pharmaceutical industry. Pharmaceutical companies make medical products, or drugs. Most drugs are made up of at least two core components—the active pharmaceutical ingredient (API) and the excipient. For example, in the case of a Tylenol pill, the API would be the fever and pain-reducing ingredients, while the excipient would be the gel capsule. The final medical product, which is a combination of a specific dosage of APIs and a particular excipient, is referred to as a formulation.
Second, an interesting environmental dynamic that greatly dictates the feasibility and cost of drug research is the drastic difference between regulated and unregulated markets. Intuitively, a regulated market is one that has stringent approval processes for new medical products, as seen in the United States, Germany, and Japan. On the other hand, unregulated markets have very little, if any, government oversight over the drugs available on the market. In practice, this correlates to the cost of bringing a new medical product to market. To put things into perspective, in a regulated market, on average, a drug’s development life cycle takes over ten years and costs $2.6 billion as of a 2014 study by CSDD. A major downside of unregulated markets, from a business perspective, is that they are less likely to facilitate adequate intellectual property protection, thus adding further uncertainty to the costly endeavour of developing new drugs.
For the sake of brevity, suffice it to say that a variety of significant shifts occurred in the pharmaceutical industry in the late nineties, in particular affecting companies in unregulated markets, such as China and India. Most of these shifts could have been foreseen by forward-thinking managers. Put simply, value chains that were profitable disappeared and new value chains emerged due to several factors, perhaps most notably major improvements in intellectual property protections.
Conducting new drug research became feasible in unregulated markets and those companies that did not anticipate these changes could not compete with those that were prepared. Orchid not only anticipated the changes to IP laws in India, but also ensured that the company was focused on activities in which they were highly likely to maintain a competitive advantage. For instance, Orchid positioned itself early as an Indian-based company serving regulated markets, in particular the United States. It generally shifted from being an efficient production-based company to one centered on research, compliance, and a greater focus on underserved markets.
Although there is little indication of changes to intellectual property protection and enforcement for the global web software industry, the supply chain is changing drastically. Web engineering agencies that have not already adapted their value chain by properly integrating third-party software usage are not going to be able to compete due to the higher costs of re-creating existing functionality. Agencies that understand the value of managing the logistics of third-party software integration, but have failed to establish a process for doing so, may end up being overwhelmed by the technological debt that results from poorly integrated modularity.