Last updated on May 6th, 2021 at 08:51 am
The creation of a product or service involves a full range of activities or steps between conception and distribution. This includes raw materials procurement and various manufacturing activities.
Every company analyzes its value chain to increase production efficiency. This is what delivers maximum value to the customers at the lowest possible overheads.
But what does value chain analysis entail?
Value chain analysis involves the critical examination of every step in the business to identify bottlenecks, waste, and inefficiency to improve the business. The ever-increasing competition for customer loyalty has made value chain analysis a critical process.
But where does the concept originate from?
Francois Quesnay became the first to publish work on profit models in 1758. Wassily Leontief outlined the input/ output interconnectivity between industries, and Michael Porter expanded on it.
Porter’s value chain is an analytic structure framework that traces independent activities from conception of the idea or acquisition of raw materials up to the consumers’ hands. This framework is valuable today as it was in 1985 because it helps identify linkages between critical product development activities.
While the value chain’s discussion mainly focuses on the process’s frameworks and mechanics, the analysis produces more information. It is where the business identifies real market opportunities. According to Porter, companies gain a competitive advantage from using new technologies and employing new ways to conduct activities or different inputs.
Porter divided the value chain activities involved to produce the products into two: primary and supportive. The activities in every category differ based on the industry.
While Porter’s model is comprehensive and complete, it is far from absolute. Instead, the value chain is customizable to the needs or situation of every organization. It is the starting point of analysis and adjustments to align the business with market dynamics.
For an industry such as brick-and-mortar or online retail, the value chain describes actions that allow the retailers such as Amazon to sell goods. Critical activities for retailers such as Walmart include constant evaluation of suppliers to keep the costs down.
On the other hand, UPS and other delivery services invest in services and infrastructure to deliver services quickly, manage capacity and keep the costs down. Their value chain models include logistics analysis associated with delivery services in complicated environments.
There are various components in the primary activities whose main objective is to add value to the products and ensure a competitive advantage. These include inbound logistics, receiving, storage, and management of inventory, the first activities of the value chain.
The next stage is processing the raw materials into finished products before distribution to the consumers. For a business such as a supermarket, the outbound logistics include home delivery. But there are also other ways.
Porter acknowledged it was possible to gain a competitive advantage by conceiving new ways to conduct activities. This is precisely what Trader Joe did when they were a bit creative with various tactical logistics such as product tastings.
Marketing and sales to enhance the visibility of the products is another critical process. Trader Joe’s uses in-store tastings to improve the in-store experience and develop and maintain customer loyalty.
Trader Joe’s also has an innovative culture and unique branding to stay ahead in the market. They have identified what customers want and have used this information to create a winning business model through marketing.
The last piece of the puzzle is programming to enhance customer experience.
For example, after-sale service, refunds, repairs, and maintenance go a long way into making customers satisfied with their purchases. Trader Joe’s employs various programs to ensure customer satisfaction, such as the no-questions-asked refunds.
Business activities in this category are supportive of the primary activities. They make them more effective. The supportive activities are typically overheads in the income statement.
For example, procurement, or how an organization gets its raw materials, directly affects the inbound logistics. Better procurement processes ensure the business obtains the best products at reasonable prices. This has a direct impact on profitability and overall efficiency.
Technological development is at the heart of product innovation, manufacturing automation, and technique. This supportive service improves the procedures and processes involved in converting raw materials into finished products.
Then there’s also human resources management.
It is up to the HRM to bring in people most qualified to design and fulfill the organization’s business strategy. These people also market and sell the firm’s products and services. A highly efficient HRM department has benefits throughout the primary activities and the value chain at large.
Certainly, human resource management touches every component of the value chain and is critical to profitability and competitive advantage. Having efficient human capital managing the inventory, operation, outbound logistics through marketing sales and services benefits the business in more ways than one.
But having the right human capital is not enough. The business must also invest in infrastructure.
Infrastructure, in this case, is quality control, accounting, and finance. In the absence of efficient quality control, customer satisfaction is out in the wind, and so is sustainable profitability and competitive edge. Planning and accounting touch every primary activity in the business.
The Value Chain Modelling Challenges
No doubt, value chain modeling has numerous benefits for organizations in all industries. However, value chain analysis is not without challenges.
One of the most significant is sorting through the direct and indirect activities that impact the value chain. Some individual organizations have numerous needs that can prove an uphill task to the template, and developing a plan to include everything is equally complicated. This is where some organizations hire the services of operation consulting.
A value chain is critical in finding competitive differentiators and profit areas, but it is dynamic, which is a problem. Modeling demands constant evaluation, attention, and updating to keep up with the progress of the business.
Competitive advantage is only possible when the business perceives new ways to adjust and manage the entire value chain to sync with the progress. By the time the value chain was introduced, computers and associated technology were not ubiquitous, yet the modeling is applicable today.
It is up to the business to create and enable the value chain that keeps pace with emerging technologies and other industry dynamics.