In the world of business, organizations of all shapes and sizes are swayed by the competitive environment, which has been more challenging than ever before. For many companies, continually examining the value they create is vitally important if they want to retain their competitive advantage. Value chain analysis is a proper method for drawing a critical path to increase customer value but with lower cost.
What generating a value chain plan can help is to discern inefficient areas of your business so that you can implement suitable strategies to optimize every part of the procedures for maximum profitability.
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In 1985, Michael E. Porter, a professor at Harvard Business School, introduced the concept of a value chain in his book called Competitive Advantage: Creating and Sustaining Superior Performance. He wrote: “Competitive advantage cannot be understood by looking at a firm as a whole. It stems from the many discrete activities a firm performs in designing, producing, marketing, delivering, and supporting its product.”
Value chain can simply refer to the full range of activities undertaken by a company to produce its products and deliver them to final consumers. In every stage of the procedures, the value of the products or services is added. The steps include bringing a product from conception to distribution, such as buying raw materials, manufacturing, and marketing.
There might be confusion between the concept of the value chain and supply chain. It can simply be clarified that supply chain represents steps it takes to get a product or service to customers, while value chain is a set of activities which a manager looks for opportunities to create competitive advantages.
According to Porter, a business’s activities can be grouped into two categories, which are “primary” and “support” ones.
There are five components of primary activities which are crucially important for a company in adding value and gaining competitive advantage:
The name says it all, and these activities help improve the efficiency of primary activities. When one of the below support activities is performed effectively, it benefits at least one of the five primary activities.
Around the world, there are many famous case studies about value chains of well-known big firms. For many industries, value chain analysis has always been a useful management strategy for companies to maximize efficiency in the process of delivering final products to customers.
In Food and Beverage, Starbucks, one of the most recognized brands in the world, is also a popular example of successfully implementing the value-chain concept. The corporation selects the finest coffee beans all over the world from Latin America to Africa and Asia; gains customer loyalty by providing excellent customer service, and shows its unique identity through many creative marketing campaigns. Numerous articles have written about the journey and how Starbucks incorporates the value chain into its business model. Or, you can watch this video below to catch a glimpse of the company marketing activity.
In Retail, in order to keep the costs low to its customers, Walmart constantly invests in performing value chain analysis. This global retail tycoon regularly evaluates its suppliers and is able to press suppliers for lower prices due to Walmart’s financial clout and size. Also, both online and in-store experience are integrated to enhance customer value. However, poor reputation in terms of customer service is a weakness of this company.
In E-commerce, Amazon is one of the biggest names. This technology company’s most notable activities are logistics, customer service, and product return. Amazon makes plenty of investments in improving the efficiency and speed of logistics service, which belongs to the list of its competitive advantages. For customer service, one annual report of Amazon says “we seek to be Earth’s most customer-centric company”, and truly the company offers exceptional customer service for its both types of customer (sellers and buyers).
In the way of approaching how to perform your value chain analysis, there are two different directions to follow, which depends on your decision of creating competitive advantages (cost or differentiation).
If you want to understand the sources of your cost advantages and disadvantages to be cost-competitive, then this is the right approach (Amazon and Walmart are good mentioned examples). You can also know what factors drive your cost while running your business. Basically, you should go through 5 steps:
This step is obviously important since you must identify all activities in the procedures of producing products or services, and separate them from each other. It is essential to know how they can bring value to your customers.
You should prioritize addressing those activities that are the major source of costs or undertaken less efficiently. Also, the total costs of producing goods or services should be broken down into each activity.
As a manager, you must know what factors that drive all the cost in order to improve every process. For instance, direct labor hours are an element that leads to an increase in manufacturing products costs. There are several technical cost drivers such as machine hours, the number of product returns, the machine setups required for production.
You must always remember every activity in your business is vital and they support each other. Therefore, cost reduction in one stage may help reduce costs in subsequent activities or sometimes it goes the way around. An example for this is when you simplify and create an innovative design of products, there will be fewer faulty parts and lower your further service costs.
Once you determine what and where in your procedures should be improved, seek out a room for a proper solution. You should create a plan or strategy to deal with the situation. If the wage rates are too high, for instance, you can outsource jobs to lower-wage countries or utilize the advancement of technology.
Another way of obtaining competitive advantages is to differentiate your business. This can occur anywhere in your value chain. If your company strives to create unique value by producing innovative products or providing superior services, you should follow 3 following steps:
This is the step where you should mainly focus on what activities in the process that contribute the most to create more value for your customers. For example, Starbucks tends to innovate its customer experience through continuously improving customer service so that they can enjoy their cups of coffee with pleasure, not just to drink normally.
There are many strategies that can help you differentiate your products as well as customer value. You should always consider your customers’ perspective before making any decision, such as add new product features or offer complementary products. Also, do not forget to make use of your free resources, which could be a free guide or a company branded calendar to support your plan.
It is important to get your differentiation strategy undertaken in an appropriate place, suitable time with the right targeted customer.
Your products may be superior and unique to help you gain competitive advantages, but you must remember to keep your value chain linked to the value chain of suppliers and buyers. Porter calls that the value system which can relate to all activities of your business while you operate. If all values meet, it will be easier for you to deliver satisfying products or services to your customers.
Understanding value chain is a great support to direct strategies for a business. By analyzing value chain and generating the company’s plan strategically, create more value of its products, services, and customers is created. Also, this can help companies find out their competitive advantages so that they can improve and develop to get their customers strongly engaged in the products and services.
Posted by Rainy in Blog . June 26, 2019