Plan Of Your Value Chain To Deliver Your Products

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.

What is the value chain?

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.

Key takeaways:

• A value chain is a roadmap that shows how a product or service goes from being an idea to becoming a reality.
• Value chains make businesses work better so they can give the most value while spending the least amount of money.
• The main aim of a value chain is to help a company be better than its competitors by making more things while spending less money.
• The value-chain theory looks at a company’s five main jobs and four extra jobs that support those main ones

How Do Value Chains Work?

The value chain concept involves breaking down a business’s activities and costs into separate stages, assessing each one’s contribution to the overall product value. Companies often use sales data and customer feedback to evaluate value creation at each stage, enabling them to set pricing strategies that maintain demand for both premium and lower-cost products.

Using the example of a musical instrument manufacturer like Fender, the value chain includes stages such as raw material procurement, manufacturing, marketing, sales, and customer support. Fender invests more in materials and labor for its American-made guitars compared to those made in Mexico, leading to higher perceived value and prices for the American models. Despite similarities in components, differences in the value chain influence costs and pricing, which Fender manages by analyzing sales data and customer feedback to sustain demand for both product lines.

Activities of the value chain

According to Porter, a business’s activities can be grouped into two categories, which are “primary” and “support” ones.

Primary activities

There are five components of primary activities which are crucially important for a company in adding value and gaining competitive advantage:

• Inbound logistics: receiving, warehousing, managing inventory of all inputs as raw materials.
• Operations: the process where finished goods or services are created by converting raw materials.
• Outbound logistics: distributing your products to reach the final consumers.
• Marketing and Sales: planning strategies and implement them to approach appropriate target customers. For example, the 4Ps of marketing.
• Services: all efforts and activities to enhance customer experience such as maintenance, repair, customer service, etc.

Support activities

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.

• Procurement: the acquisition of inputs for the company.
• Human Resources management: hiring, training, and retaining employees who can fulfill your business strategy, firing or laying off of workers (if needed).
• Technological development: everything related to equipment, hardware, software, procedures such as designing and developing manufacturing techniques; usually used at a company’s research and development stage (R&D)
• Infrastructure: company system, organizational structure, functions of departments such as accounting, finance, legal, quality control, planning.

Examples of value chain

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).

Value Chain vs Supply Chain

In the realm of business management, the concepts of Value Chain and Supply Chain play pivotal roles in enhancing organizational efficiency, optimizing processes, and ultimately delivering value to customers. Here are the differences between Value Chain and Supply Chain:

Value Chain:

• Focus on the internal activities and processes within a business.
• Analyze each stage of production and assess its contribution to the final product’s value.
• Help in setting pricing strategies and enhancing efficiency within the organization.
• Aim at maximizing value creation for customers and competitive advantage for the business.

Supply Chain:

• Encompass the entire process from raw material sourcing to delivering the final product to the end customer.
• Include activities such as procurement, manufacturing, logistics, distribution, and customer service.
• Emphasizes coordination and collaboration with suppliers, manufacturers, distributors, and customers.
• Aim to optimize the flow of goods and information to meet customer demand efficiently while minimizing costs and maximizing profitability.

How to generate your value chain plan to deliver your product

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).

Discovering cost advantages and disadvantages

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:

Step 1: Identify your company’s primary and support activities.

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.

Step 2: Rating the importance of every stage in adding the value on products or services.

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.

Step 3: Identify cost drivers.

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.

Step 4: Identify links between activities.

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.

Step 5: Identify opportunities for improvement.

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.

Gain competitive advantages through differentiation

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:

Step 1: Identify activities that create your customer value.

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.

Step 2: Identify differentiation activities to add more value.

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.

Step 3: Finding opportunities for differentiation.

It is important to get your differentiation strategy undertaken in an appropriate place, suitable time with the right targeted customer.

Link your value chain to the value chains of your suppliers and buyers

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.

In Summation

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.

FAQs

1. What is the purpose of analyzing the value chain?

Analyzing the value chain helps businesses identify areas where they can improve efficiency, reduce costs, and enhance the value of their products or services to customers.

2. Can the value chain concept be applied to service-oriented businesses?

Yes, the value chain concept is applicable to both goods-producing and service-oriented businesses. In service businesses, the value chain may include activities such as customer relationship management and service delivery.

3. What are the types of value chains?

There exist two main types of value chains. Physical value chains pertain to the manufacturing and distribution processes of tangible products. Conversely, virtual value chains are instrumental in disseminating digital goods or information to customers or users.

4. Why does value chain analysis matter?

Studying the value chain helps businesses compete better by pointing out where they can do things better than their competitors. Michael E. Porter, who coined the term “value chain,” described it as a “methodical way of looking at all the things a company does and how they work together, which is important for understanding where competitive advantages come from.”

5. What role does technology play in optimizing the value chain?

Technology can automate processes, streamline operations, and provide data analytics that enable companies to identify opportunities for improvement within their value chain.