Every enterprise can be thought of as a complex machine. Each part of the machine plays a part in the execution of its primary function. And when the machine fails to function in its designated capacity, you can trace the problem to a fault with one of its parts.
So if your business is not performing according to expected standards, the problem may lie with one of its parts. This problem often appears as a fault in its value chain. And when this happens, the business will not provide its intended value to its customers and shareholders.
This makes it crucial for business leaders to assess their value chain. This article stresses the importance of value chain analysis and how you can do it.
What is it?
Value chain analysis is an exercise that business leaders undertake to create more productive and efficient business systems. It includes a series of actions initiated over a business's life cycle to sustain it. The aim is to push the business to provide its intended value and meet its goals in the long term.
It is done on key internal processes and organizational activities to diagnose problems and proffer solutions. It can also identify the room for improvement in any process it examines. When this happens, the customers can enjoy the increased value on offer. The business's shareholders can also make more profit.
According to Michael Porter (its creator), the value chain analysis covers several stages of a business's life cycle. This can also be translated to a product's or service's life cycle. He also grouped the activities covered in his framework into two categories. They include primary activities and support activities, as defined below.
Primary Activities
Primary activities include five components that provide value and create a competitive advantage. They include the following:
Inbound logistics: Supply sourcing, warehousing, inventory keeping
Operations: Work processes and other production-centered activities
Outbound logistics: Distribution channels, merchandising, etc.
Marketing and Sales: Advertising, product promotion, and other target trading activities.
Service: Customer service, repair, maintenance, and other customer-related activities that improve the customer experience.
Support Activities
Support activities complement the primary activities and make them more effective. They include the following:
Procurement: Related to a company's approach to acquiring raw materials.
Technology development: Concerned with the company's innovative processes, design, development, and implementation.
Human resources (HR) management: Includes staffing, personnel training, and development strategies.
Infrastructure: Accounts for the company's organizational structure, management systems, etc. It also includes the company's strategies for financing, quality control, sales, etc.
When do we use it?
Businesses use value chain analysis to design and execute more efficient work processes. They also use it to:
Explore opportunities in diverse business prospects and check if they are profitable.
Identify problem areas in their operations and other primary activities.
Develop effective operational strategies that businesses can adopt for long-term purposes.
Identify the most viable cost-effective approaches to any key business operation or decision.
Identify the causes of failure and underperformance that organizations experience.
What business questions is it helping us to answer?
Below are some of the questions that it helps business leaders to answer.
What can I do to improve the state of operations in my workplace? Which tweaks can I add to the processes and work methods to make them more efficient?
How can the company approach its logistic challenges? For example, how can it make its material procurement and processing system more efficient?
How can it create increased value for its customers? How can it always meet its customers' needs?
What marketing strategy can it adopt to attract potential customers?
How can it introduce innovative and strategic approaches to its operations?
How do we use it?
To conduct a value chain analysis, business leaders must examine each stage of their business's life cycle. This action will help them gain a competitive advantage in those primary and support activities discussed earlier. These competitive advantages can come in either of two forms; differentiation advantage and cost advantage.
Cost Advantage
The companies that enjoy the highest patronage have the lowest-priced products on offer. Therefore, these companies must develop a cost-advantage strategy that maximizes their resources and create high-performing processes.
Differentiation Advantage
Any company seeking a differentiation advantage must create a unique product/service. Your customers must feel they have their full money's worth (and even more) when they buy the products.
To achieve these advantages, take the following steps.
Identify your business/organization's primary and support activities.
Determine the total cost and value of both activities.
Compare your findings with that of your nearest competitor.
Identify areas in need of improvement.
Explore and exploit areas where you can achieve a competitive advantage.
Practical example
A brewery uses value chain analysis to review its operations and find the cause of its recent drop in sales. In addition, it examines its logistics records (inbound and outbound) and other primary activities.
This leads it to uncover a problem with its distribution outlet. As a result, it settles for a revamp of its distribution infrastructure, among other things.
First, it procures new trucks and fits them with novel tracking technology. It then hands them over to a new distribution team. In a short while, sales will return to normal.
Advantages
Value chain analysis can help companies gain a competitive advantage in their industries. They can achieve this with the price or the value of the product/service on offer.
It provides valuable insights into the most complex nature of organization and management. It promotes customer satisfaction and the sustained profitability of any business.
It promotes efficient management of resources, processes, and other workplace-related activities.
It is a flexible management tool. You can apply it across various workplace conditions and operations.
It can help organizations properly understand their strengths and weaknesses.
Disadvantages
Not all businesses/organizations can allow for an accurate value chain analysis. This is often seen in non-manufacturing companies.
Undertaking an extensive value chain analysis is not always smooth sailing. It may present huge cost, time, and resource implications for certain businesses.
Questions will arise about the consistency of its findings in some dynamic work settings. For example, this is often experienced when certain market forces conspire to cause price fluctuations.
The accuracy of the value chain analysis is subjective. It depends on the capacity of those charged with carrying it out.
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