The Virtual Value Chain: Digitally Transform Your Business

Many people have heard of the value chain, the series of steps a business goes through to create and deliver a product or service. A virtual value chain is like the digital mirror of that—only for delivering information through digital goods and services.

You see a virtual value chain in action when your dentist sends an automated text message reminding you of an upcoming appointment. And you can click a link to reschedule if needed.

Nearly every business should build a virtual value chain, even if they interact with most of their customers face-to-face because a virtual value chain enables businesses to serve customers better. This can give you a competitive edge. Serving customers better and beating the competition are two benefits that are good for any business.

What is a virtual value chain?

A virtual value chain (VVC) is a digital version of the traditional value chain. While the traditional value chain focuses on creating value through physical goods and services, the virtual value chain focuses on creating value through information and digital services.

The virtual value chain model is crucial in e-commerce because it enables businesses to gain a competitive advantage by leveraging data to improve customer experiences, adapt quickly to market changes, and streamline operations.

Virtual value chain vs. traditional value chain

The virtual value chain model was created by John Sviokla and Jeffrey Rayport in 1995. They observed that businesses were increasingly functioning in two worlds: the physical marketplace and the virtual marketspace. If businesses wanted to be competitive, they needed to be skilled at operating in both worlds.

However, businesses couldn’t operate in the virtual world by using the same value chain because the traditional value chain deals with physical goods and services. The virtual value chain is all about data.

In the physical world, the traditional value chain follows a straightforward path. If you make shirts, the value chain begins with obtaining and refining raw materials, moves on to making the shirts, storing the finished product, selling them, and finally, offering customer support.

The value chain creates value for the business by using data to manage these five steps as efficiently and effectively as possible.

• Inbound logistics. Bringing raw materials into the business
• Operations. Turning raw materials into finished goods
• Outbound logistics. Moving finished goods into inventory
• Marketing and sales. Selling finished goods
• Service. Supporting customers after the sale

A virtual value chain turns raw data into something useful for the customer. This may involve using data to source raw materials more efficiently so your most popular items are always in stock. Or loading product data into a mobile app that lets customers use augmented reality to “try on” shirts with their own outfits.

Unlike the physical value chain, the virtual model doesn’t follow a straight path because you get to pick what information matters the most. You can start by laying the virtual value chain within any of the five stages of the physical value chain. Then apply each of these five steps to uncover opportunities for delivering more value to customers.

1. Gather. Collecting and stacking information
2. Organize. Sorting and keeping info so it’s easy to find and analyze later
3. Select. Choosing the pieces of data you want to share
4. Synthesize. Packaging data in a way customers can easily use
5. Distribute. Passing the info to the customer

Why the virtual value chain is important for businesses

As mentioned earlier, a virtual value chain turns raw data into something useful for the customer. In turn, those value-added products and services may support business growth and resiliency by:

• Opening doors to new markets
• Enhancing customer experiences
• Building brand loyalty
• Creating a competitive advantage
• Enabling faster response to changing business needs

And the more value-adding activities you move from the marketplace into the marketspace, the more your business harnesses the potential of the virtual value chain.

Perhaps few companies do this better than online behemoth Amazon. You can buy just about anything through its online store—from a $1.29 avocado to a $4 million oil painting. Even more impressive is how many orders can be delivered the same day.

Amazon regularly evaluates every aspect of their fulfillment network to see where they can be more efficient. The company uses placement logic to pinpoint the optimal location for its same-day fulfillment centers, for instance. And they use in-stock fulfillment algorithms and innovative processes to move items from order placement to delivery-ready in as little as 11 minutes.

While 11 minutes is fast, Amazon continues looking for ways to move even faster. They know that when customers browse product pages and see how quickly they can get their desired item, they’re more likely to make the purchase. They’re also more likely to consider shopping through Amazon again.

Another, and often overlooked, way to gain efficiencies is by using the virtual value chain for talent advantages. Consider how:

• Ensemble Consultancy saved their client $5 million by collaborating with a design agency located hundreds of miles away
• Shutterstock saved time in finding, onboarding, and paying content creators to achieve their innovation goals‍
• Crownpeak streamlined its hiring process with Upwork, which dropped their time-to-hire from 90 days to 9

Three stages of implementing a virtual value chain

The three stages of implementing a virtual value chain are: visibility, mirroring, and new customer relationships.

We’ll illustrate each step using a case study by Chang Le,  Arun Kumar, and Sung J. Shim. In the study, the authors demonstrate how a hospital can apply the virtual value chain to shorten the time it takes to fill prescriptions.

Stage 1: Visibility

Use information to get better at "seeing" what's happening in your physical operations. This is where you’ll use technology systems and tools to extract data and coordinate activities in your physical value chain.

The information you collect will help you plan and execute tasks, and also evaluate results with greater accuracy and speed. And your efforts will lay the groundwork for improving visibility and identifying value-adding steps in the marketspace.

Example

In the Singapore General Hospital (SGH) study, the authors got a clearer view of what patients experience by collecting data from the hospital’s SAP system, EMR (electronic medical record) processes, floorplans, and operations. Their review showed that patients had to stand in four different lines to get their prescriptions filled:

1. One for a medical consultation
2. A second to fill the prescription
3. A third to collect the prescription
4. And a fourth to pay

Stage 2: Mirroring

Now that you have greater visibility into your entire operations, ask what you’re doing in the physical world that you could do more efficiently or effectively in the virtual world. What activities can you move from the marketplace to the marketspace? As you move activities, you begin to create a virtual value chain that mirrors and improves the physical value chain.

Example

In the SGH study, the authors optimized the pharmacy process by changing some of the original hierarchical steps into parallel ones that can still be supported by the current information systems. So, instead of having patients physically move the prescription through the workflow, patients just walk from their medical consultation to the hospital pharmacy.

Their prescription is sent to the pharmacy via the EMR so that the patient’s movement and information handling happens independently and in parallel channels. So, if the patient stops for a cup of coffee on their way to the pharmacy, the prescription is still being processed. What’s more, the new process eliminates one line.

‍

Stage 3: New customer relationships

Once you’re comfortable managing the unique activities of the physical and virtual value chains, those value-adding activities turn into new customer relationships.

Example

Increasing costs and limited resources make it difficult for hospitals to pull more value from the physical value chain. By incorporating the virtual value chain, SGH could optimize the physical value chain so much that they fill prescriptions 8.3 minutes faster on average.

What patients may notice is how they don’t have to wait for their prescription as long as at other hospitals. The improved process feels more efficient and less stressful. These takeaways may cause patients to feel the hospital is more capable and caring than competing hospitals.

Getting fewer complaints about wait times is a positive outcome. But that’s not all. The optimized system could potentially lower labor costs, as the process cuts the number of billing and registration counters required at the pharmacy.

How to implement a virtual value chain in your business

The virtual value chain builds new, positive relationships with customers by turning raw data into new services and products. The process takes time and involves a completely different set of activities than a traditional value chain.

Implementing a virtual value chain involves these steps:

1. Perform value chain analysis‍
2. Gather and analyze data‍
3. Create digital replicas of physical processes‍
4. Encourage digital customer interactions‍
5. Generate new customer value through information‍
6. Integrate the virtual value chain into daily operations‍
7. Evaluate the success of your implementation‍
8. Future-proof your virtual value chain
‍

1. Perform value chain analysis

A value chain analysis examines all the steps involved in making and selling your products or services. You break down each step and look at where you can make improvements that benefit customers.

If you were setting up a lemonade stand, your value chain would look something like this:

• Get lemonade and stand supplies
• Make the lemonade
• Set up the stand
• Pour lemonade into cups
• Sell lemonade to customers

In a value chain analysis, you'd examine each of these steps closely to see how you can produce your lemonade faster, cheaper, and better tasting and make customers happier.

This type of analysis helped Kinetic Investments identify that the faster they could access skilled talent, the better they could support the development and growth of their portfolio companies. So, Kinetic Investments virtualized their workforce model.

Instead of increasing their capabilities just by hiring more employees, the company fills skills gaps by pulling in independent talent through Upwork as needed. David Merry, the company’s U.K. General Manager at Kinetic Investments, explained:

“Our company and our portfolio business have used Upwork to find workers in just about every field. Through the platform, we have the flexibility to find talent from beginners, who are just getting started, to veterans with $1M in billings. We can also access and engage motivated talent more cost-effectively. This access to talent has changed the dynamics of our business and positively impacted our success.”

2. Gather and analyze data

Now that you’ve broken down your value chain to uncover opportunities, you might also see the root cause of problems, where risks could be avoided, or where you could remove friction from the customer experience.

To know what improvements to prioritize and how to do it, investigate further by gathering and analyzing relevant data.

You could probably get all the information you need using common data analysis techniques including regression, factor, and cohort analysis. However, these traditional methods could be time-consuming as they rely on humans to do a lot of tedious work.

So why not speed up the process by virtualizing the step? More and more companies are using AI in data analytics to do the manual work so their human analysts can identify opportunities faster.

And if your analytics team can’t get to your request for several months, don’t let their schedule derail you. Consider contracting data analytics specialists to get the work done on time.

3. Create digital replicas of physical processes

Here, you’re creating online versions of physical business processes. But your online version is better because you’re not limited by the same resources that you are in the physical world.

Take banking for example. In the past, you had to visit a physical branch office to do basic transactions like opening an account and depositing a check. Then banks began moving more of those information-based activities online. So now, you can handle most of your banking needs from your smartphone 24/7.

What’s more, the bank can scale its transactions without having to hire more bank tellers or extend physical office hours.

By creating a virtual, parallel world, they’re using information they always had to make banking more convenient for you, the customer. And it’s also more cost-effective for them.

4. Encourage digital customer interactions

Your virtual product or service benefits customers only when they use it. Here are a few ways to encourage them to give it a try and make it a new habit.

• Integrate across multiple channels. Ensure that customers can easily transition between physical and online channels. Think of the example of grocery stores letting you order online and then pick up at the store.
• Let your customers know about it. Launch marketing campaigns to highlight the benefits of your digital service or product.
• Offer incentives. Provide special promotions, discounts, or loyalty rewards for customers who give the new offer a try.
• Make it user-friendly. Make your new product or service easy and convenient to use. And focus on channels that customers want to use. If they prefer transacting through a mobile app, make sure the design is responsive and intuitive.
• Offer customer support. Convenience is important here, so give them multiple ways to reach you like chat, social media, and email.
• Gather feedback. Solicit feedback to regularly adapt and improve your product or service, or know when it may be time to retire it.
• Analyze data regularly. Customers don’t always tell you what they’re thinking. So dive into customer data to understand their behaviors and preferences. Then adjust your product and marketing strategy accordingly.

5. Generate new customer value through information

Many businesses believe they should build a virtual value chain so they can do what they do better, faster, and cheaper. While these may be the benefits of virtualizing, they’re not why a business should do it.

The purpose of implementing a virtual value chain is to create so much value for customers that they’ll want to go to you instead of a competitor.

For instance, online shopping is convenient, but some things may be easier to buy in person. If you were shopping for eyeglasses, you may feel more comfortable having an experienced person help you choose a frame that not only looks good but also feels comfortable.

6. Integrate the virtual value chain into daily operations

Harness the virtual value chain’s full potential by ensuring employees are in full support and have the tools to manage performance.

• Set clear objectives. Know what success looks like. Set key performance indicators (KPIs) so you can measure performance and track progress.
• Invest in the right technology. Have the necessary technology infrastructure, software, and tools in place to support the virtual value chain. Foster coordination and visibility by implementing systems that provide real-time data sharing between the physical and virtual worlds.
• Establish data management practices. Have processes for collecting, storing, and analyzing data effectively. Also have processes for keeping customer data private and secure.
• Train teams well. Make sure teams are knowledgeable about the new service or product. And that they’re comfortable with the tech tools and software used to support it. Provide regular training to keep teams updated as products and tools evolve.
• Leverage data analytics. Regularly extract meaningful insights from the information gathered from the virtual value chain. Use these insights to identify areas for improvement and new opportunities.
• Implement change management practices. Ensure that your employees are comfortable with the transition from the physical to the virtual realm. Communicate the benefits, provide support, and use change management software to guide the transition.
• Develop a risk management strategy. Address potential cybersecurity threats and data breaches. Implement security measures to protect your digital assets and customer information.
• Establish feedback loops. Regularly gather input from customers and employees on the effectiveness of your virtual value chain. Use this feedback to make adjustments and improvements.

7. Evaluate the success of your implementation

Use these tools to ensure that your efforts are producing the desired results:

• Key performance indicators (KPIs). Define and track specific KPIs related to the virtual value chain, such as customer retention, revenue growth, customer satisfaction, and operational efficiency. Monitor these metrics regularly to gauge progress.
• Return on investment (ROI). Calculate the ROI by comparing the costs of implementing the virtual value chain (including technology investments and training expenses) to the benefits generated, such as increased revenue and reduced operational costs.
• Customer feedback. Conduct surveys, analyze customer reviews, and listen to their suggestions. Their feedback could help you understand their satisfaction levels and any areas that may need improvement.
• Team feedback. Get feedback from team members who are directly involved in the implementation and operation of the virtual value chain. Their comments may reveal areas for improving efficiency and effectiveness.
• Adoption rates. Measure the adoption rates of your digital platform or online services among your target audience.
• Competitive position. Compare your competitive position in the market before and after implementing the virtual value chain.

8. Future-proof your virtual value chain

Future-proofing the virtual value chain is essential to ensure that your business remains adaptable and resilient as technology and markets change. You may want to:

• Cultivate a culture of adaptability. Encourage employees to embrace change and be open to new technologies and processes. Start by modeling the behavior from the top, coaching members through challenges and rewarding their efforts.
• Invest in regular training and skill development. Keep your workforce updated and comfortable with the latest technology and trends, so they can use them effectively.
• Choose scalable technology solutions. Ensure that your virtual value chain infrastructure and tools can handle increasing data volumes and user loads.
• Prioritize data security and privacy. Stay informed about data protection laws to remain in compliance. And keep vigilant about new threats and ways to keep data protected.
• Collaborate with technology partners. Stay competitive by working with suppliers and third-party providers who offer ways to use their information to enhance your virtual value chain.
• Focus on customer desires. Regularly gather feedback, analyze customer behavior, and adapt your digital offerings accordingly.
• Build a skilled workforce. Train, upskill, and reskill employees so they can use technology in ways that benefit customers most. And consider modernizing your work model, as Upwork does, to fill in skills gaps with independent talent and turn game-changing ideas into realities.

Case studies of successful virtual value chain implementation

Here are a few more real-world examples of businesses benefiting from the virtual value chain.

Tesla extends service by applying new ways of working on old models

Instead of going into a dealership, Tesla customers order their cars online. Each car is made to order, so customers get exactly what they want instead of settling for what’s in existing inventory. And customers avoid the discomfort of dealing with high-pressure salespeople and spending hours haggling over prices.

Inventory data is also pulled into the interactive online ordering system so that customers can see how long it’ll take to receive their car. They can also see options for getting their car faster, and perhaps cheaper, by purchasing available cars nearby.

Moving the entire car-buying experience from the marketplace to the marketspace enables Tesla to cut costs associated with physical dealerships and reduce inventory.

Source: Tesla.com
‍

Upwork expands product offerings by leveraging its remote work expertise

Upwork is a leader in connecting talent with clients around the world, on a project basis. Achieving this seamlessly requires tremendous systems, HR, technology, operations, and legal capabilities that work in a high-functioning digital ecosystem.

Upwork builds upon their strong digital foundation to create products and services that respond timely to their clients’ and talents’ changing needs, such as enabling clients to turn their favorite independent talent into full-time employees.

Using the virtual value chain enables Upwork to reach new audiences and solve their pain points, create new revenue streams, and potentially increase their customers’ lifetime value.

Cotton Incorporated enhances customer service through 3D and AR

The fabric company Cotton Incorporated digitizes their fabrics into an online library that can be viewed in 3D and augmented reality (AR).

Designers and brands can browse the digital library and see a fabric’s texture, how it stretches, “feel” the weight of it, and more. They can also use their smartphone to experience how the fabric or garment they’re designing drapes and adjusts to different lighting conditions.

The convenience reduces designers’ reliance on physical samples, gives them more opportunities to experiment with different fabrics, and shortens their design timelines. Cotton Incorporated benefits by increasing fabric sales while reducing the cost and waste associated with physical samples.

‍

‍

Potential challenges in implementing the virtual value chain

Implementing a virtual value chain can transform a business, but getting there can be challenging. Here are common obstacles along with strategies to overcome them:

CHALLENGE: Employee resistance

PROBLEM: Employees resist learning new tech and processes or fear their jobs will be replaced by computers.

SOLUTION: Provide comprehensive training and clear communication about the benefits of the virtual value chain. Engage employees in the transition process and address their concerns. Bring in a change management specialist to guide employees through the process.

CHALLENGE: Insufficient technology infrastructure

PROBLEM: Outdated or inadequate technology infrastructure may not support the requirements of a virtual value chain. Integrating existing physical value chain processes with the virtual value chain can be complex, leading to data silos and inefficiencies. And moving processes online can open more doors to security and privacy concerns.

SOLUTION: Invest in modern and scalable technology infrastructure that can accommodate the increased digital load. Prioritize cloud-based solutions for scalability. Invest in robust integration solutions and ensure that data flows seamlessly between physical and digital systems. Implement strong data security measures. Regularly update security protocols. Bring in a specialist to help develop and manage the integration strategy.

CHALLENGE: Teams lack digital skills

PROBLEM: Employees lack the digital skills to manage and support activities in the virtual value chain.

SOLUTION: Offer training programs, reskilling, and upskilling opportunities to employees. Contract independent professionals to fill skills gaps and shoulder some of the workload so that employees have time for training and learning new skills.

Future trends in the virtual value chain

Information is the raw material and product of the virtual value chain. Not surprisingly, future trends revolve around data safety and improving how businesses gather, analyze, and use data to give customers what they want. These include:

• Investing more in compliance measures. Stricter data privacy and cybersecurity regulations will require that businesses do more to protect customer information.
• Demanding more data storage and governance. As the amount of data needed to fuel analytics and applications grows, new ways will emerge for people to use the data safely and with integrity.
• Using AI to get more personal. Businesses will continue to lean on AI-powered tech, like natural language processing (NLP), to understand customers more deeply and deliver even more personalized experiences.
• Making more decisions with AI. Businesses will expand opportunities to leverage AI’s ability to analyze enormous datasets, learn from it, and teach itself to refine its analysis over time. The speed and accuracy of its decisions will be applied to every step of the virtual value chain.
• Building off of cross-functional data. More data, insights, and resources will be shared with cross-functional teams to build larger digital ecosystems. The bigger picture view may allow for deeper understandings and transparency that will enhance the virtual value chain.
• Integrating partner data into the customer experience. Working with suppliers, manufacturers, and carriers will give customers more speed, transparency, and reliability over the entire buying process.

Optimize your virtual value chain with Upwork

The virtual value chain focuses on benefiting the customer. The model takes data you already have and transforms it into a new digital product or service that could give your business a competitive edge, such as the way Tesla removed friction from the car-buying experience by putting the entire ordering process online.

Your virtual value chain doesn’t have to be that game-changing, but you’ll have a hard time competing without one. Consider how many restaurants now offer online ordering for instance. The value-added service is so common that if a restaurant doesn’t offer the option, customers may feel inconvenienced.

If you’re ready to build your first virtual value chain or you want to disrupt an industry, Upwork can help. Browse the marketplace for skilled AI, engineering, and data analytics talent who are available to work on your next project.

Or book a consultation with an expert to talk through and refine your project before getting started. No matter where you are on your digital transformation journey, Upwork has the talent to help you achieve your goals.