With each transaction, successful businesses produce value for their customers in the form of satisfaction, as well as for themselves and their shareholders in the form of profit. Companies that provide more value with each sale have a better chance of profiting than those that produce less value. It’s vital to understand your company’s value chain in order to assess how much value it generates.
Here’s an overview of what a value chain is, why it’s important to understand it, and how you can use it to help your business create and keep more value from its sales.
Understanding Value Chain
The phrase “value chain” refers to all of the commercial activities and procedures that go into making a product or providing a service. A value chain can span various stages of a product’s lifecycle, from research and development through sales and all in between. In his book The Competitive Advantage: Creating and Sustaining Superior Performance, Harvard Business School Professor Michael Porter developed the notion.
Taking stock of the processes that make up your company’s value chain will give you a better understanding of what goes into each transaction. Your organisation can be better positioned to share more value with consumers while capturing a larger portion of the value created at each point in the chain by maximising the value created at each point in the chain. Similarly, understanding how your company creates value can help you better appreciate its competitive edge.
Components of Value Chain
All of the activities that make up a firm’s value chain, according to Porter’s concept, can be divided into two groups that contribute to its margin: primary activities and support activities.
Primary activities are those that directly contribute to the development of a product or the delivery of a service, such as:
- Receiving, warehousing, and inventory management of source materials and components are all part of inbound logistics.
- Raw materials and components are turned into a completed product through operations.
- Outbound logistics refers to distribution-related activities such as packaging, sorting, and shipping.
- Marketing and sales activities include promotion, advertising, and pricing strategy, all of which are relevant to the marketing and sale of a product or service.
- Installation, training, quality assurance, repair, and customer service are examples of after-sales services that take place after a sale has been completed.
Secondary activities are divided into the following categories to help primary operations become more efficient, hence creating a competitive advantage:
- Procurement refers to the activities involved in obtaining raw materials, components, equipment, and services.
- Product design, market research, and process development are examples of activities associated to technological advancement.
- Employee recruitment, hiring, training, development, retention, and remuneration are all part of human resources management.
- Infrastructure includes activities such as funding and planning that are related to the company’s overhead and management.
What is Value Chain Analysis?
Value chain analysis is a method of assessing each activity in a company’s value chain to determine where improvements might be made.
A value chain analysis forces you to analyse how each step contributes to or detracts from the value of your end product or service. As a result, you may be able to gain a competitive edge, such as:
- Cost savings are achieved by making each operation in the value chain more efficient and thus less costly.
- Product differentiation can be achieved by devoting more time and resources to tasks such as research and development, design, and marketing.
In most cases, improving one of the four secondary activities will help at least one of the primary activities.
How to Conduct Value Chain Analysis
- Identify Value Chain Activities
Understanding all of the main and secondary actions that go into the creation of your product or service is the first step in doing a value chain analysis. If your organization sells a variety of items or services, this procedure should be followed for each one.
- Determine the Cost and Value of Activities
After identifying the major and secondary operations, the next step is to assess the value that each activity brings to the process, as well as the associated expenses.
When considering the value provided by activities, consider how each contributes to the end user’s satisfaction or enjoyment. How does it add value to my company? Is it true that using particular materials to build a product makes it more durable or luxury for the user? Is it more likely that your company will benefit from network effects and more business if you include a given feature?
Similarly, knowing the expenses associated with each step in the process is critical. Depending on your circumstances, you may discover that cutting costs is a simple method to increase the value of each transaction.
3. Identify Opportunities for Competitive Advantage
You may assess your value chain through the lens of whatever competitive advantage you’re seeking to
acquire once you’ve compiled it and understand the cost and value associated with each stage.
If your primary goal is to lower your company’s costs, for example, you should assess each component
of your value chain through the lens of cost reduction. Which steps could be made more productive?
Are there any that don’t add much value and could be outsourced or deleted entirely to save money?
Similarly, if product differentiation is your primary goal, which portions of your value chain provide the
best potential to achieve that goal? Would the added value justify the expenditure of more resources?
You can identify multiple opportunities for your company through value chain analysis, which can be tough to prioritise. It’s usually better to start with the changes that require the least amount of effort yet provide the highest return on investment.