Everything you need to know about your company's value chain

Posted by Fernando Solano on Jul 23, 2019 11:53:54 AM
Fernando Solano

The internet allows companies to access a worldwide customer base, which means that companies face unprecedented competition. Even niche businesses meet competitors from other parts of the world. CWhile this may bring some obstacles, companies can take advantage of the opportunities offered by globalization and place themselves in a position of competitive advantage. The value chain analysis helps companies implement, in a coordinated manner, all their actions to achieve either a differentiation strategy or a low-cost strategy.

Performing the value chain analysis will allow you to stand out from your competition, generate value, and strengthen your position as a leader in your industry.
What is the value chain analysis?

The value chain analysis consists of analyzing your competitive advantage by decomposing your company into discrete activities or processes, and then examining how each one contributes to the relative cost position or comparative provision payable. The activities carried out to design, produce, sell, deliver, and maintain goods are those that ultimately incur costs and generate the customer's willingness to pay. The differences between companies in activities - differences in what companies do every day - lead to differences in cost and willingness to pay.


Benefits of value chain analysis:

The goal of value chain analysis is to determine how to create maximum value for your business and customers at the lowest cost. It also allows you to have the complete panorama of the business. This is because when you do not have any recommendation for improvement, you base your decision making on mere conjecture and you cannot anticipate if the changes you decide to make will actually generate significant value to the business. 

By improving your value chain, you are also increasing the competitive advantage of your company by any of the following two ways:


Differentiation Strategy: Increasing the willingness to pay for a product or service with only a slight increase in costs


Low-Cost Strategy: Obtaining significant cost savings at the expense of small decreases in the customer's willingness to pay.


Consider, for example, Toyota and Hyundai vehicles. Most customers would be willing to pay more for a Toyota car than for a Hyundai. The costs of manufacturing a Toyota are significantly higher than the costs of manufacturing a Hyundai. Toyota's slightly higher profit margins are due to the fact that the difference in willingness to pay is a slightly higher than the incremental costs associated with its product.



How to do a value chain analysis?

Michael Porter provided us with a template of activities to guide us when it comes to breaking down the company into activities that are either primary or support activities; which contribute to the proposed generation of value from conception to delivery.

 

activity template

 

Identify primary activities and support activities: There are five generic categories of primary activities related to competition in any industry. Each category is divisible into several different activities that depend on the particular industrial sector and the company's strategy.


Input Logistics: Activities associated with receipt of raw materials or other products from suppliers, storage, and distribution of those materials for the production process.


Operations: Activities associated with the transformation of inputs (raw material, energy, human resources) into a final product or service.


Outbound Logistics: Activities associated with the storage and distribution of your final product to distribution centers, wholesalers, retailers, and consumers.


Marketing and sales: Activities associated with providing a means by which buyers can buy the product and induce them to do so. For example advertising, promotion, channels, price.


Service: The activities required to keep the product/service working effectively for the buyer;  includes, among others, installation, training, repair, maintenance.


Depending on the industry each of the categories can be vital for competitive advantage. Some examples are:


  • For a distributor, internal and external logistics activities are critical.
  • For a company that provides the service, such as a restaurant, external logistics may hardly exist and operations, the vital category.
  • For a bank, marketing and sales are a key to competitive advantage through the effectiveness of calling officials and telling them how loans are packaged and valued.
  • For a manufacturer of high-speed copiers, the service represents a key source of competitive advantage.
  • It is important to clarify that in any company - regardless of whether it is a service or manufacturing company - all categories of primary activities will be present to some degree. This is important to keep in mind since many analysts argue that a weakness of the model is that it is only useful for manufacturing companies.



Support activities help primary activities achieve a competitive advantage. Some examples are:



  • Technology development: Activities that help determine how the company can use technology to automate processes and develop new products.
  • Human resources management: Activities related to recruitment, training, employee retention.
  • Procurement: Activities related to purchases seeking the best quality at the best price.
  • Company infrastructure: Activities related to company structure, management, planning, accounting, and finance.


Don't be afraid to work as a team since you may have to rely heavily on the leaders of the departments that are in charge of each activity. Remember, it is unlikely that a single person will be completely familiar with all the daily operations of each department.


Analyze the business activities: Think about the decision of how your business will compete: Will it generate additional value, that is, will it compete for differentiation? Will you compete as the lowest cost provider in the industry? The decision you have made will guide you to perform the analysis of the value chain of your business in a coordinated manner pursuing a single objective.
Link each business activity with the value it offers. Evaluate what your company needs to do and what you need to change to be consistent with the way you compete and generate the most value according to the objective.


Create an action plan: A company's value chain analysis takes time to complete. Be careful not to lose momentum during this process. After having identified the activities that generate the most value for your business, you must make decisions and make the necessary changes to align the system - the company - to the strategy - be it differentiation or low cost -.


Stay practical, identify the changes, and act according to the following scenarios:


1. If you have identified that some changes will only bring marginal improvements, but require great effort and costs, consider if they are really worth addressing.

 2. Focus on making significant changes to your business, prioritizing them by sharing them with stakeholders so that you have their approval and support. At this point, we advise starting with the simplest changes, since when you make them successfully, you will generate small victories that are important to keep your team's morale high. Once the team sees the changes and the results they will feel confident in addressing the biggest and most valuable changes.


Topics: business models, strategy

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