Service Industry Value Chain Analysis

1. Introduction

Gaining a competitive advantage over other companies in the market is one of the primary goals of
any business. It increases the profit margins, attracts more customers, and strengthens the brand
identity. Value chain Analysis is a visual tool to analyze the business activities that can help gain a
competitive advantage and identify the gaps to improve efficiency and add value for the business.
The traditional value chain is structured more around the manufacturing industry rather than the
services industry. However, the conventional value chain analysis can still be tweaked to use the
value chain concept and come up with its service value chain.

Performing a value chain analysis enables the management to break down company logistics,
operations, and infrastructure to reveal the actual value of a product or service. It can also help you
identify a competitive advantage you have over rival businesses.

2. Background of the Service Industry

The service industry is the industry that delivers services instead of tangible products. The service
industry may include banking, hospitality, communication, computer software, virtual trade,
hospitals, etc. In the last few years, economists have noticed a grand shift of industry from
manufacturing to service industry. A main contributing factor to this trend is the fact that most of the
work in the manufacturing industry is taken over by machines, so there is less demand for the
workforce. While the service industry is still open to explore.

3. Primary Activities in Value Chain for Service Industry

According to Porter, companies can use two different ways to increase their profits by using value
chain analysis:

Cost leadership: it means cutting costs and streamlining processes to increase profit margin.

Competitive differentiation: Brand yourself as a different company and offer a unique, high-quality
service.
Inbound Logistics:

The service value chain consists of different inputs, outputs, and activities from the manufacturing
industry. It has the following characteristics.

Inseparability: This type of service is delivered to many consumers simultaneously, for example, an
information message.

Intangibility: This type of service is customized for one consumer or a group of consumers, for
example, a tennis lesson.

Perishability: Services are not perishable products, so they cannot be saved or stored, e.g., repair
service or hotel room.

Heterogeneity: the quality of service and experience might change from person to person, for
example, the responsiveness and quality of customer service.

Inbound logistics are defined as how raw materials and supporting supplies are acquired for use in
the company. You can see this definition is more suited to the manufacturing industry. However, the
supply value chain also covers inbound logistics, but the nature of the products is different. For
example, the inbound logistics in the Airbnb model include peer-to-peer listings of accommodation,
experiences, and adventures. In their model, the host can fill in their available properties, facilities,
and prices on the online portal without any extra cost.

Operations:

The need for operations management might not look very important at first glance in the supply
value chain. However, here the operations are the processes that make the services possible and
deliver the experiences to consumers. For example, you need food, bedding, drinks, and other
necessities well-stocked for quick customer service delivery in the hospitality industry. In tourism,
you need to manage transport, boarding, and lodging along with emergency measures.

Outbound Logistics:

Outbound logistics covers the warehousing and distribution of goods in the conventional business
model. However, in the service value chain, outbound logistics activities include direct service
delivery to the consumer without any intermediate agents or time delays. So, the characteristics here
are different. For example, an internet service provider is concerned that the bandwidth, download
speed, and quality of service delivered from the company's end are delivered smoothly to the
consumer. Similarly, the banking industry's outbound logistics revolve around providing a good
customer experience and reliability during transactions.

Marketing and Sales:

Sales in the industry value chain mean convincing your prospective customers to buy your services.
While marketing means creating demands by offering the right services to the customers looking for
them.

Lead generation is a prime example of marketing and sales in the service value chain. In the
traditional industry value chain, you market around your product features. While in the service value
chain, you need a different approach to sell your services.

Service:
In the service value chain analysis, it is essential to note that the business's success is mainly
dependent on word of mouth and reviews of the customers. Since the products are not physical, the
new customers will want to know the experience of other customers. Considering this, after-sale
support services are crucial to the success of the services business. A good customer experience
means customer loyalty, customer retention, and indirect marketing for the company.

4. Service Industry’ Support Activities

Support activities in the value chain analysis lay a strong foundation for the physical activities to be
conducted. This is like a framework that encompasses the primary activities and provides support.

Infrastructure

Infrastructure needs in the value chain for the services industry differ in form and scale for different
services businesses. For example, the hotel industry needs an extensive physical infrastructure,
including buildings, bedding, food, and much more. In comparison, IT services companies need data
servers, communication channels, Fiber optics, etc. Infrastructure also encompasses finances,
accounting, planning, and legal wings.

Human Resource Management

Despite the growing role of technology in the service value chain analysis, human resources continue
to play a critical role in the value chain for the service industry. Different models of service value
chain require different levels of human resource management activities like hiring, training, and
facilitating the employees. For example, the Airbnb model has employees who mainly take care of
the IT infrastructure. While in the banking industry, the workforce is enormous. There are multiple
aspects of HRM like legal proceedings, training the corporate staff, teaching courses, and maintaining
the privacy of transactions. So HRM must invest more effort, time, and resources.

Technology Development

The role of technology has grown exponentially in the last decades. Some of the service value chain
industries are based purely on technological advancement. For example, internet service providers,
Amazon cloud services, and Airbnb; all are success stories of advanced technology. Technology is a
critical source of competitive advantage in today's world. Therefore, innovation and research in this
segment cannot be ignored.

Procurement

Procurement again differs between different service value chains. In the Airbnb model, procurement
is minimal. While in the banking industry, they need to buy supplies for running the business.
However, in the hotel industry, procurement is a large-scale activity. End-of-life management is an
ongoing challenge in the hotel industry. So, they need to replace equipment and the daily running
supplies often. As a result, they must select the best suppliers at a reasonable price to cut extra costs
and purchase the

5. Key Takeaways

A value chain analysis can depict the way to profitability for any company. The service value chain
analysis aims to align the service industry with the highest standards of customer experience. This is
the basic foundation of gaining a competitive advantage for any business.

6. References
1. Airbnb Value Chain Analysis. Research-Methodology. Published September 16, 2019.
Accessed August 27, 2021. https://research-methodology.net/airbnb-value-chain-analysis/

2. Five Procurement Best Practices in the Financial Services Industry. SpendEdge. Published
March 15, 2021. Accessed August 27, 2021. https://www.spendedge.com/casestudy/five-
procurement-best-practices-for-the-financial-services-industry

3. NetSuite.com. Inbound vs. Outbound Logistics. Oracle NetSuite. Accessed August 27,
2021. https://www.netsuite.com/portal/resource/articles/inventory-management/inbound-
outbound-logistics.shtml