Speaker 1: In the previous video on the VRIO framework, we already talked about how internal resources and capabilities can lead to a sustained competitive advantage. In this video, we will explore the internal organization and its activities even more through a systematic approach better known as the value chain analysis. Because by mapping out a company's value chain, you will be better able to assess where true value is created and where improvements should be made. My name is Lars and welcome to a new episode of Business To You. A company is in essence a collection or stream of activities that are performed to design, produce, market, deliver, and support its product or service. You could also say that a company transforms certain inputs into a final product, the output. Its goal is to produce the products in such a way that they have a greater value to customers than the original cost of creating these products. The added value can be considered the profits and is often indicated as margin. Michael Porter figured it was important to come up with a systematic way of examining all of these internal activities and how they interact in order to better analyze the sources of competitive advantage. He therefore created the value chain analysis and published his ideas in the book, Competitive Advantage, Creating and Sustaining Superior Performance in 1985. Porter's value chain helps disaggregating a company into its strategically relevant activities, thereby creating a clear overview of the organization. A company gains competitive advantage by performing these strategically relevant activities more cheaply or better than its competitors. The term value chain should not be confused with the term supply chain. One company's value chain is embedded in a larger stream of supply chain activities that Porter defines as the value system that also includes suppliers and buyers. This video will not go into the entire supply chain from suppliers all the way to the end consumer, but rather focuses on one organization's value chain. Porter divided an organization's value chain activities in primary activities, which are directly involved in the physical creation and selling of the actual products, consisting of inbound logistics, operations, outbound logistics, marketing and sales and service, and support activities, which surprisingly support all primary activities and each other consisting of procurement, technology development, human resource management and firm infrastructure. Now, we could explain all of these nine generic categories of activities the traditional way, showing beautiful animations, but in this case, it is perhaps easier and more informative to visit an actual company and show the value chain in real life. Leon, what do you think? Could we do something like that? Sure, but it's really rainy, so you'll need your coat. Thank you. So, we're currently in Heerhugowaard, a city north from Amsterdam in the rainy Netherlands, and we're standing in front of Besselink Technologies. This company has been producing state-of-the-art cleaning robots for greenhouse rooftops for over 30 years now. Its product, the RoofMaster, has been helping growers from all over the world washing greenhouse rooftops more efficiently and more sustainable, causing more sunlight to enter the greenhouse and eventually allowing crops to grow faster. And we are going inside to have a closer look at Besselink's value chain. We start the value chain with the left end of the primary activities, the inbound logistics. This is where purchased inputs, such as raw materials, are taken care of. Because of this function, it is also in contact with external companies, such as suppliers. The activities associated with inbound logistics are receiving, storing, and disseminating inputs to the product. Examples include inbound material handling, inspection, warehousing, inventory control, and returns to suppliers. Right now, we are in Besselink's stockroom. For Besselink, the purchased inputs mainly consist of metal pieces, electric wires and cables, brushes, et cetera, that will eventually end up somewhere in the RoofMaster. Once the required materials have been collected internally, operations can convert the inputs into the desired product. The activities associated with operations are machining, production, assembly, packaging, equipment maintenance, testing, and quality control. As can be seen behind me, Besselink has a dedicated team of technicians who craft the RoofMaster largely by hand. And the result is this amazing piece of technology. And that brings us to the outbound logistics. After the final product is finished, it still needs to find its way to the customer. Depending on how lean the company is, the product can be shipped right away or has to be stored for a while. The activities associated with outbound logistics are collecting, storing, and physically distributing the finished product to buyers. Examples include finished goods warehousing, outbound material handling, sorting, order processing, scheduling, and transportation. At Besselink, customers are scattered all over the world. Apart from its home market in the Netherlands, the company has customers in, for example, China, Russia, Middle East, Australia, and the United States. The transportation of the RoofMaster to these different parts of the world goes largely by land and sea. Marketing and sales. The fact that products are produced doesn't automatically mean that there are people willing to purchase them. This is where marketing and sales come into place. It is the job of marketeers and sales agents to make sure that potential customers are aware of the product and are seriously considering buying them. The marketing and sales activities are therefore there to provide a means by which buyers can purchase the product and encourage them to actually do so. Examples include advertising, promotion, sales force management, distribution channel selection, and pricing. Great tools to structure the entire marketing and sales process are the marketing funnel or IDA model. And I'm standing here next to Jorien, who's Besselink's commercial director. Jorien, could you tell us a little bit about what Besselink's marketing and sales activities mainly imply?

Speaker 2: Thank you. Yes, I can. At Besselink, we are normally very active on trade shows. And we try not only to visit our customers on that trade show, but also, of course, physically. And a lot of it is in Dutch. So a lot of the greenhouse builders are based in Holland, but also around the world. So we travel quite a bit. We're really active on social media. So with LinkedIn and that sort of things. And what is quite specific, I think, about the horticultural market in Holland, or at least in the world, is that we have a dedicated newsletter that is being sent out to all of the interested growers or distributors. And we do quite a lot of articles. We do some advertising. And we get a lot of market information, especially about the new trends and the new upcoming markets.

Speaker 1: Which is really helpful for your message to the outside world.

Speaker 2: Yes, to spread the word and to look where our business is.

Speaker 1: Yeah, well, thank you very much.

Speaker 2: My pleasure.

Speaker 1: In today's economy, after-sales service is perhaps even more important than promotional activities. Complaints from unsatisfied customers are easily spread and shared, and the negative consequences for your company's reputation might be vast. Moreover, since customers nowadays are more demanding and want a complete solution rather than just a product, service is often seen as an extension of the product itself and the price that customers are willing to pay. It is therefore important to have the right customer service practices in place. The activities associated with this part of the value chain are providing service to enhance or maintain the value of the product after it has been sold and delivered. Examples include advice, installation, repair, customer training, ongoing maintenance, parts supply, and product adjustments. Here at Bestling, there are several service and maintenance mechanics who visit customers on-site in case of the need for installation and repairments. And of course, customers can always reach the employees right here by phone and email for answers to all kinds of burning questions. And that brings us to the support activities, starting below with procurement. This activity refers to the function of purchasing inputs used in the entire company's value chain and is responsible for negotiating prices and purchasing items such as raw materials, consumables, machinery, equipment, office supplies, and buildings that are needed for all activities within the value chain. Procurement should therefore not be confused with inbound logistics where raw materials are physically received and stored. At Bestling, there are purchasers such as Martijn and Niels who are in contact with all kinds of suppliers on a daily basis to purchase items that are requested by people from other departments and agree on the prices that Bestling is willing to pay for them. Technology development. Remember that Michael Porter wrote his book in 1985. Now decades later, technology has pretty much changed everything for good and the technology development activities have gained in importance for every company out there. It has become one of the principal drivers of competition. Technology is embodied in every value chain activity, both primary and support activities, and is needed to improve both the product itself and the production process. It takes up many forms such as telecommunication, accounting software, ERP systems, product R&D, marketing research, and process automation technology, and should also take into account more contemporary technological trends such as artificial intelligence, 3D printing, augmented and virtual reality, robotic process automation, quantum computing, blockchain, cybersecurity, data science, and cloud, just to name a few. Because of the power of technological change to influence competitive advantage and even industry structure, a company's technology strategy has become an essential ingredient in its overall competitive strategy. Bestling has been innovating a lot in software apart from optimizing the Roofmaster's hardware. Nowadays, customers can easily control the Roofmaster through an app or let the Roofmaster operate fully automatically by simply connecting the robot to the greenhouse internal climate system. So we're currently on the roof of Bestling's production facility where a sample of a greenhouse rooftop has been built. Every time the engineers of Bestling have new technological ideas for the Roofmaster, they can test the modifications right here before actually implementing it in their product. Human Resource Management, or HRM, consists of all the activities involved in the recruiting, hiring, training, developing, compensating, motivating, and retaining of all types of personnel. It is HR's responsibility that the right skills are available at the right time for the various value chain activities. And finally, firm infrastructure consists of a number of activities, including general management, planning, finance, accounting, legal, government affairs, and quality management. Firm infrastructure, unlike other support activities, usually support the entire value chain and not just individual activities. Firm infrastructure is sometimes viewed only as overhead, but can be a powerful source of competitive advantage as well. If you tie all of the aforementioned activities together successfully through effective communication, you get an organization where a complex but innovative piece of technology, like the Roofmaster, can be manufactured and where true value is created for customers, suppliers, employees, and shareholders. Let's get back to the studio for the final section of the video. And we're back in the studio. Identifying the generic value chain activities is the first step in diagnosing a company's sources of competitive advantage. It might, however, be necessary and desirable to divide activities even more into discrete sub-activities. For example, marketing and sales might be too far-reaching for a specific company and should ideally be divided into a separate traditional marketing department, a digital one, a promotional department, and a sales force department. Labels can be chosen freely, depending on what kind of company you're dealing with. But it is advisable to broadly follow the actual process flow of a company when ordering the activities into a value chain. In the end, everything that a company does should be captured as a primary or a support activity. The next step is to evaluate how all of these activities communicate together and interact with each other. Porter calls these relationships internal linkages. Linkages can lead to a competitive advantage in two ways, optimization and coordination. Optimization occurs, for example, when you improve the inspection of purchased materials in inbound logistics. By doing so, you reduce the need for control efforts in operations, thereby lowering the quality control costs within that value chain activity. Another example of optimization is an improvement in innovation capabilities from the people within technology development. Imagine that they are able to come up with a technology that automatically detects defects in products more quickly. It would potentially lower the need for service mechanics from after-sales service. A decision made in one activity therefore directly affects another value chain activity, either positively or negatively. That brings us to coordination, which is also essential when improving the value chain. Imagine you optimized HRM by hiring an experienced recruiter, which in turn has led to a better fulfillment of a long, outstanding and vacant marketing position for marketing and sales. The new marketing manager launched a successful marketing campaign that has eventually driven up sales massively. In such a case, it is also important that production is able to scale up quickly enough to cope with the increased demands. That might mean that new production machines have to be bought at procurement and more skilled workers have to be recruited and hired by HRM again. You will understand that efficient coordination among all of these activities is also crucial here in addition to optimization to keep the process flow smooth and competitive. If these optimization and coordination efforts are weak or inefficient, it may lead to miscommunications, misalignments, double work and increased costs resulting in lower margins. In general, you could state that the stronger the internal linkages are, the more competitive you will become and the higher margins will turn out. If you combine the value chain analysis with the VRIO framework we talked about previously, you have a good starting point for an internal analysis. Complement this with both a PESTEL analysis and Porter's Five Forces for the external environment and you will have an even more complete understanding of a certain business and its surroundings. I'm curious to hear from you what framework you would like to see covered in the next video. Comment down below and subscribe if you don't want to miss out on future content. As usual, thanks for watching and don't forget, alone we are smart, together we are brilliant. See you next time.