The original concept of the value chain was published by Michael Porter. It helps us examine value in the film industry but also to understand the value chain in relation to strategy.
The value chain describes the activities around and within an organisation which together produce a product or service. The concept was originally developed in relation to competitive strategy. The value chain can assist with the analysis of the strategic position of an organisation in two ways:
- As a generic description of activities that help managers understand if there is a cluster of activities providing benefit to customers located within particular areas of the value chain. It can also prompt managers to think about the role different activities play
- A tool to identify what a manager should focus on in developing a more profitable business model.
A single organisation rarely undertakes all of the value activities from design through to the delivery of the final product to the final consumer. There is usually specialism of role so any one organisation is part of a value network. The value network is the set of interorganisational links and relationships that are necessary to produce a product or service. So an organisation needs to be clear about what activities it ought to undertake itself and which it should perhaps outsource.
However since much of the cost and value creation will occur in the supply and distribution chains, managers need to understand this whole process and how they can manage these linkages to improve customer value. For example the quality of a film when it reaches the viewer in the cinema is influenced not only by the activities undertaken by the film company but also by the quality of inputs from suppliers and performance of distributors. It is therefore important that executives, producers and directors understand the basis of their organisations strategic capabilities in relation to the wider value network.
Four key issues that need to be considered are:
What activities are centrally important to the organisations strategic capability?
Film is a highly competitive market. When organisations face the need to cut costs in key areas, they have to decide which activities are central to it achieving competitive advantage and therefore sensible to retain control of these capabilities, and which can be outsourced often to lower cost suppliers.
Where are the profit pools?
Profit pools refer to different levels of profit available at different parts of the value network. Some parts of the value network may inherently be more profitable than others because of the difference in competitive intensity. The strategic question becomes whether it is possible to focus on the areas of greatest profit potential. You need to be careful with this. It is one thing to identify such potential but it is quite another to be successful given the strategic capabilities the organisation has.
Make or buy?
The make or buy decision for part of the process is therefore crucial. This is an outsourcing decision. The more an organisation outsources, the more its ability to influence the performance of other organisations in the value network becomes a critically important competence and is in itself a source of competitive advantage.
Partnering is also an option. Film companies can develop different types of relationships with each partner and whether they are considered to be suppliers or alliance partners. Some film companies have benefitted from closer relationships with suppliers as they co-operate on things such as writing and editing.
Other important functions in the value network can be provided more efficiently and effectively by value chain specialists such as payments or logistics.
If film organisations leave a number of value activities to specialists then can then create a third- party marketplace and offer for example sustainable prop supplied for film.