All the steps carried out within an organisation that create value for particular product is defied as value chain. The steps required include those to obtain materials from suppliers, the internal operations performed on materials and the distribution of the product. The value chain also include the marketing of products and after-sale services, plus the support functions of an organisation.
According to wikipedia a value chain is "a set of activities that firm operating in a specific industry performs in order to deliver a valuable product to the market".
It was first described by Michael Porter in 1985.
The idea is based on the process view of the organisations and seeing the business as a system made up of subsystems, each with inputs, transformational processes and outputs. This involve acquisition and consumption of resources - labour, equipment, labour, money, land, administration and management.
How value chain activities are carried out determines costs and affects profits.
Porter develops strategic tools for the decision making.
Here, a questions comes to mind: how do we change business inputs into outputs in such a way that they have a greater value than the original cost of creating those outputs?
Value is at the heart of every business. The profit margin is the amount of value an organisation can create minus the cost of creating that value. The greater the value and the lower the costs, the higher the business profits will be.
Understanding how business creates value and the ways on how it can add more value are critical for the organisational competition strategy.
Porter propose a genuine value chain that any business can use to examine all its activities. His model can be used to ask yourself where we can create value. The chain focuses of systems, rather than departments or accounting costs times. It divides activities in the system into two categories: Primary and Support.
Primary activities relate directly to the creation, sale, maintenance and support of the product or service. They include Logistics, Operations and Marketing.
They consist of the following:
- Inbound Logistics - receiving, storing and distributing inputs internally. Supplier relationships are the key factors in creating the value.
- Operations - activities that change inputs into outputs that are sold to customers.
- Outbound logistics - these activities deliver product or service to the customer and include collection, storage, distribution.
- Marketing and sales - processes to persuade clients to purchase products or services.
- Service - these activities maintain the value of products to the customers once purchased.
Support activities include Human Resources, Procurement and Research and Development.
These activities include:
- Procurement - getting resources to operate, finding suppliers and negotiating prices
- Human resources - these activities include recruitment, training, motivation and rewards for people who are considered as a significant source of value
- Technological development - managing and processing information and protecting company's knowledge. Maintaining technological excellence creates a lot of value to the business.
- Infrastructure - accounting, legal, administrative and general management.
According to Porter primary and support activities are broken down into three types of sub-activities: Direct, Indirect and Quality Assurance.
Direct sub-activities can create value by themselves, where Indirect sub activities help other activities run smoothly. Quality Assurance activities help other activities keep to the required standard.
Business can identify which sub-activities give them the most value. This can also be done by finding links between sub-activities. Businesses may be able to reduce their costs, retain people for longer and retain their customers.
Porters value chain is a useful strategic management tool for identifying where the greatest value lies in the organisation and how it can be increased.
Manufacturing companies create value by procuring raw materials and using them to produce something useful. The value that's created and captured by a company is a profit margin:
Value Created and Captured - Cost of creating that value = Margin
The more value business creates, the more profitable it will be and built competitive advantage.
Using the value chain
1) Identify sub-activities for each primary activity
For each primary activity determine Direct, Indirect and Quality Assurance sib-activities
2) Identify sub-activities for each Support activity
Consider how Human Resource Management, Technology Development and Procurement support activities create value for each primary activity
3) Identify links
Look for connection between all the value activities identified. These are key to increasing the competitive advantage.
4) Search for opportunities to create value
Evaluate each of the sub-activities and the identified links than consider how you can change or enhance it to maximise the value offered to customers. Think about how to set yourself apart from the competitors or lower the costs. These may involve a long list of changes, which need to be prioritised. Its a good idea to take a look at the organisation from a broader perspective.
Value chain analysis
The more value we create, the more people will be willing to pay for products or services.
Value Chain Analysis allows to identify potential ways to create value for customers and discovering how to enhance and maximise the value.
First, we identify the activities to create and deliver product or service and analyse them. It is a brainstorm session. This will generally include step-by-step business processes use to serve customers. From marketing, sales, operations, delivery, support and so on. It is important to ensure these activity step is done with a team and now on your own as it will be reacher and most likely get the engagement with further steps. The activities need to be listed and simplified in a chart or graph.
Than, we are analysing the value of each process. This is done by listing relevant to each activity "Value Factors". It is a good idea to think about what customers will value in each activity being analysed.
Next to these, we can now write down and list changes and plans for actions that can be taken to provide great value for each Value Factors. It will generate plenty of ideas, but we need to be careful with having too many changes as we may end up allocating hundreds of different tasks and never complete any of them. That's where priorities should be determined. Each project shall be planned into actionable steps that are achievable and allow steady improvement.
Conclusions
Value chain analysis is a powerful managerial tool of thinking through the ways organisation can deliver value to customers. It is structured with a simple actionable steps of Activity Analysis, Value analysis and Planning for actions. By using it, we can achieve excellence in things that matter to our customers and therefore enhance the competitive advantage.
Comments