When addressing the value-chain concept, it is important to focus on the interrelationship
between the organization and its most important stakeholder—its customers. Some firms
find great value by directly incorporating their customers into the value creation process.
Firms can do this in one of two ways.
First, they can employ the “prosumer” concept and directly team up with customers to
design and build products to satisfy their particular needs. Working directly with customers in this process provides multiple potential benefits for the firm. As the firm develops individualized products and relationship marketing, it can benefit from greater customer
satisfaction and loyalty. Additionally, the interactions with customers can generate insights
that lead to cost-saving initiatives and more innovative ideas for the producing firm. In discussing this concept, Hartmut Jenner, CEO of Alfred Karcher, a German manufacturing
In the future, we will be talking more and more about the “prosumer”—a customer/producer
who is even more extensively integrated into the value chain. As a consequence, production
processes will be customized more precisely and individually
Second, firms can leverage the power of crowdsourcing. As introduced in Chapter 2,
crowdsourcing occurs when firms tap into the knowledge and ideas of a large number of
customers and other stakeholders, typically through online forums. The rise of social media
has generated tremendous opportunities for firms to engage with customers.31 In contrast
to prosumer interactions, which allow the firm to gain insights on the needs of a particular
customer, crowdsourcing offers the opportunity to leverage the wisdom of a larger crowd.
Many companies have encouraged customers to participate in value-creating activities, such
as brainstorming advertising taglines or product ideas. These activities not only enable
firms to innovate at low cost but also engage customers. Clearly, a marketer’s dream! At the
same time, crowdsourcing has some significant risks.
Understanding the Perils of Crowdsourcing
While crowdsourcing offers great promise, in
practice such programs are difficult to run. At times, customers can “hijack” them. Instead
of offering constructive ideas, customers jump at the chance to raise concerns and even ridicule the company. Such hijacking is one of the biggest challenges companies face. Research
has shown about half of such campaigns fail. Consider the following marketing-focused
• In 2006, General Motors tried a “fun” experiment, one of the first attempts to use
user-generated advertising. The company asked the public to create commercials for
the Chevy Tahoe—ads the company hoped would go viral. Unfortunately, some of the
ads did go viral! These include: “Like this snowy wilderness. Better get your fill of it
now. Then say hello to global warming. Chevy Tahoe” and “$70 to fill up the tank,
which will last less than 400 miles. Chevy Tahoe.”
• McDonald’s set up a Twitter campaign to promote positive word of mouth. But this
initiative became a platform for people looking to bash the chain. Tweets such as the
following certainly didn’t help the firm’s cause: “I lost 50 lbs in 6 months after I quit
working and eating at McDonalds” and “The McRib contains the same chemicals
used to make yoga mats, mmmmm.”
Research has identified three areas of particular concern:
• Strong brand reputation. Companies with strong brands need to protect them. After
all, they have the most to lose. They must be aware such efforts provide consumers
the opportunity to tarnish the brand. Strong brands are typically built through
consistent, effective marketing, and companies need to weigh the potential for
misbehaving customers to thwart their careful efforts.
• High demand uncertainty. Firms are generally more likely to ask for customer input
when market conditions are changing. However, this often backfires when demand
is highly uncertain, because customers in such markets often don’t know what they
want or what they will like. For example, Porsche received a lot of negative feedback
when it announced plans to release an SUV, but it went ahead anyway, and the
Porsche Cayenne was a great success.
• Too many initiatives. Firms typically benefit from working repeatedly with the
same customers. Often, the quality, quantity, and variety of inputs decrease as the
frequency of engagement increases. A study of the Dell IdeaStorm program (in which
customers were encouraged to submit product or service ideas) discovered that the
same people submitted ideas repeatedly—including submitting ones for things the
company already provided. And customers whose ideas were implemented tended to
return with additional ideas that were quite similar to their initial suggestions.
Applying the Value Chain to Service Organizations
The concepts of inbound logistics, operations, and outbound logistics suggest managing the
raw materials that might be manufactured into finished products and delivered to customers. However, these three steps do not apply only to manufacturing. They correspond to any
transformation process in which inputs are converted through a work process into outputs
that add value. For example, accounting is a sort of transformation process that converts
daily records of individual transactions into monthly financial reports. In this example, the
transaction records are the inputs, accounting is the operation that adds value, and financial
statements are the outputs.
What are the “operations,” or transformation processes, of service organizations? At
times, the difference between manufacturing and service is in providing a customized solution rather than mass production as is common in manufacturing. For example, a travel
agent adds value by creating an itinerary that includes transportation, accommodations,
and activities that are customized to your budget and travel dates. A law firm renders services that are specific to a client’s needs and circumstances. In both cases, the work process
(operation) involves the application of specialized knowledge based on the specifics of a
situation (inputs) and the outcome that the client desires (outputs).
The application of the value chain to service organizations suggests that the value-adding
process may be configured differently depending on the type of business a firm is engaged
in. As the preceding discussion on support activities suggests, activities such as procurement
and legal services are critical for adding value. Indeed, the activities that may provide support
only to one company may be critical to the primary value-adding activity of another firm.
Exhibit 3.4 provides two models of how the value chain might look in service industries.
In the retail industry, there are no manufacturing operations. A firm such as Nordstrom
adds value by developing expertise in the procurement of finished goods and by displaying them in its stores in a way that enhances sales. Thus, the value chain makes procurement
activities (i.e., partnering with vendors and purchasing goods) a primary rather than a support activity. Operations refer to the task of operating Nordstrom’s stores.
For an engineering services firm, research and development provides inputs, the transformation process is the engineering itself, and innovative designs and practical solutions
are the outputs. The Beca Group, for example, is a large consulting firm with about 3,000
employees, based in 17 offices throughout the Asia Pacific region. In its technology and
innovation management practice, Beca strives to make the best use of the science, technology, and knowledge resources available to create value for a wide range of industries
and client sectors. This involves activities associated with research and development, engineering, and creating solutions as well as downstream activities such as marketing, sales,
and service. How the primary and support activities of a given firm are configured and
deployed will often depend on industry conditions and whether the company is serviceand/or manufacturing-oriented.