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Value Chain Analysis: Success Formula for any business

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Does your business apply the Value Chain model to create a new product/service? If not yet, it’s time to start now.

Any type of business has one goal in common: to provide value to customers. The value can be tangible, intangible, or both. However, make sure that when your product is delivered to the customer’s door, they will receive it with a smile.

The value of a product stems right from the idea stage, and if you do it the right way, it will go up throughout the production process.

In this case, Business owners can use value chain analysis as a tool to gain insight into each process of their business. This analysis can be used to optimize processes, increase efficiency, and gain an edge over competitors.

In this post, I will attempt to simplify the value chain analysis, giving a comprehensive overview of its components and providing examples to illustrate. We will look into the background of the model and break it down to shed light on its complexity.

What is Value Chain Analysis?

A value chain is a sequence of activities that take place to create a product, starting with its design and ending with delivery to the customer. Each step of the process adds value, such as sourcing, manufacturing, and marketing.

Value chain analysis is a tool for assessing the individual activities in a company's value chain in order to identify potential areas for improvement.

Michael E. Porter of Harvard Business School introduced the concept of a value chain in his book, Competitive Advantage: Creating and Sustaining Superior Performance. He outlined that obtaining a competitive advantage requires looking beyond a single firm and analyzing the discrete activities it performs, such as designing, producing, marketing, delivering, and supporting its product. In doing so, the firm can maximize value throughout its processes.

KEY TAKEAWAYS

Any business owner should use Value Chain Analysis as a methodology to upgrade their business process to create more valuable products/services. You will have a closer look at every activity in your company to see if there’s any room for improvement.
Based on the Value Chain model introduced by Mr. Poster, all business activities can be classified into 2 types: "primary" and "support,". Primary activities include Inbound logistics, Operations, Outbound logistics, Marketing & Sales, and Service. While Procurement, Technological development, Human resources (HR) management, and Infrastructure belong to Support activities.
Technology makes it easier to conduct a meaningful value chain analysis, using data analytics, artificial intelligence, and automation.

The Components of Value Chain Analysis

Conducting a value chain analysis helps organizations identify and organize their business activities into primary and secondary functions. By studying the value chain activities, subactivities, and interactions between them, an organization can comprehend the system of interdependent operations.

Examining each activity or subactivity individually can then help determine if the output can be enhanced while taking into account the cost, time, and effort involved. Applying the value chain idea to an organization's activities is referred to as a "value chain analysis."

Primary activities

Inbound operations: Managing and processing external resources that enter the organization, which are known as "inputs" and can include raw materials from vendors or other supply chain sources.
Operations: Transformation of inputs into "outputs" -- the product or service offered by the business -- is an activity and process which produces items to be sold to customers at a higher price than their cost of materials and production, thus generating a profit.
Outbound logistics: Delivery of outputs to customers involves processes that involve systems for storage, collection, and distribution to the customer. This includes managing both the company's internal systems and the external systems of the customer organizations.
Marketing and sales: Advertising and brand-building activities to raise awareness, reach potential customers, and convey the value of a product or service to purchase.
Service: Building and sustaining a long-term relationship with customers through activities such as customer service and product support.

Secondary activities

Procurement and purchasing: Identifying new external suppliers, sustaining vendor partnerships, and haggling over costs and other matters related to procuring the required materials and resources for constructing a product or service.
Human resource management: Managing human capital involves activities such as recruiting, training, fostering an organizational culture, and sustaining favorable employee relations.
Technology development: Constructing and sustaining an organization's utilization of technology through activities such as research and development, IT management, and cybersecurity.
Company infrastructure: Carrying out essential business tasks including legal, general management, administrative, accounting, finance, public relations, and quality assurance is integral for company success.

Conducting a Value Chain Analysis

Performing a value chain analysis encourages one to contemplate how each step adds or diminishes value to the end product or service. This can help one gain some form of competitive edges, such as:

Lowering costs, by making the value chain activity more productive and, thus, less costly
Product differentiation, by investing additional time and resources in activities like research and development, design, or marketing that can help the product be distinct

Generally, improving the performance of any of the four secondary activities can benefit at least one of the primary activities.

1. Identify Value Chain Activities

Identifying the activities of the value chain is the initial step in conducting a value chain analysis. This should be done for each product or service offered by the company. During this process, it is important to recognize all the primary and secondary activities that are involved in the creation of the product or service.

2. Determine the Cost and Value of Activities

Once primary and secondary activities are identified, the next step is to assess the value and costs each activity brings to the process. Consider how the activity increases end-user satisfaction or pleasure, and the value it creates for the business. For instance, does making a product from certain materials make it more long-lasting or luxurious for the customer? Does adding a certain feature make it more likely that the company will benefit from network effects and more business?

It is also essential to understand the expense related to each step. Based on the circumstances, it may be beneficial to reduce costs in order to boost the value of each transaction.

3. Identify Opportunities for Competitive Advantage

Assemble the value chain and comprehend the cost and value of each stage. Then, through the lens of the competitive edge you are striving to attain, analyze it. For instance, if the main purpose is to cut down on expenses, assess each part of the value chain in terms of cutting costs. Can any be more efficient? Are there any that do not create significant value and can be outsourced or removed to reduce expenses?

Likewise, if the main goal is to establish product variation, which parts of the value chain provide the best chance to achieve this? Would the value generated warrant the investment of extra resources?

Benefits of Value Chain Analysis

The value chain framework provides organizations with an opportunity to comprehend and evaluate sources of positive and negative cost efficiency. By conducting a value chain analysis, businesses can gain numerous advantages, such as:

Making informed decisions in relation to different business activities;
Identifying and addressing areas of ineffectiveness;
Recognizing links and dependencies between various activities and areas in the business;
Maximizing output and minimizing organizational expenses;
Gaining a potential cost advantage over competitors; and
Knowing core competencies and areas of improvement.
While a value chain analysis can be beneficial, it is essential to keep in mind the organization's overall strategy when focusing on the details of the value chain.

Technology and Value Chain Analysis

In today’s world, technology has become an indispensable part of nearly every facet of our lives. From healthcare to education, technology is becoming increasingly integrated into our day-to-day lives. This same technology revolution has also been felt in the business world, particularly when it comes to value chain analysis.

Also, technology has revolutionized the way value chain analysis is conducted. By using data analytics, artificial intelligence, and automation, businesses can now gain deeper insight into their operations and quickly identify opportunities for improvement and new areas for value creation.

Data Analytics

Data analytics is one of the most important tools for value chain analysis. By using data analytics, companies can get an in-depth look at their operations, uncovering areas of opportunity and potential inefficiencies. With data analytics, businesses can also better understand their customers and markets, enabling them to make better decisions and create new opportunities for value creation.

Artificial Intelligence

Artificial intelligence (AI) is another technology that has revolutionized value chain analysis. AI enables businesses to automate routine tasks, freeing up resources to focus on more complex issues and uncovering new opportunities for value creation. AI can also be used to optimize existing processes and operations, enabling companies to improve their efficiency and maximize their value creation.

Automation

Finally, automation has become an essential part of value chain analysis. Automation enables businesses to streamline their operations and processes, reducing costs and increasing efficiency. Automation can also be used to quickly and accurately analyze data, which can be used to improve decision-making and uncover new opportunities for value creation.

Many companies are beginning to leverage technology for their value chain analysis and operations. For example, Amazon has integrated AI into their operations in order to automate routine tasks and improve their efficiency. Walmart is also using AI to optimize their supply chain and delivery process, resulting in improved customer service and increased sales.

Technology has revolutionized the way value chain analysis is conducted. By leveraging data analytics, artificial intelligence, and automation, businesses can gain deeper insight into their operations and quickly identify opportunities for improvement and value creation. As more companies begin to utilize technology for their value chain analysis and operations, they will be able to maximize their value creation and remain competitive in the marketplace.

Case Studies: Value Chain Analysis in Action

When it comes to creating value and improving the efficiency of operations, Value Chain Analysis (VCA) is an invaluable tool. VCA can help companies identify opportunities for cost savings, performance improvement, and better customer service.

To show just how powerful of a tool VCA can be, let’s take a look at a few case studies of companies that have used it to great success.

Starbucks:

Starbucks is one of the world’s most recognizable brands and has used VCA to help propel it to the top. By looking closely at its supply chain and production process, Starbucks was able to identify areas for cost savings and efficiency improvements. It then implemented these changes, resulting in an increased focus on customer service and satisfaction, as well as an overall reduction in costs.

Toyota:

Toyota is another great example of a company that has used VCA to great success. As one of the world’s most successful automotive manufacturers, Toyota has used VCA to identify areas of inefficiency in its production process and make changes that have improved its operations and reduced costs. By focusing on waste reduction, Toyota was able to improve its production process and reduce its costs, while still maintaining quality.

These case studies provide us with great examples of how companies have used VCA to create value, improve their operations, and reduce costs. By taking a close look at the supply chain, production process, and customer service, companies can identify opportunities to create value and improve their operations. By implementing the necessary changes and monitoring the value chain regularly, companies can create an even more efficient and cost-effective operation.

Conclusion

In conclusion, value chain analysis is a powerful tool that can provide businesses with insights into their operations, customer needs, and competitive strategies. This comprehensive analysis can help businesses create value for their customers, reduce costs, and increase operational efficiency.

For businesses interested in conducting a value chain analysis, it is important to remember to look beyond the traditional models of customer segmentation and competition. A thorough understanding of the value chain will help businesses identify opportunities to create value and position themselves as customer-centric organizations.

By utilizing value chain analysis, businesses can gain insight into their operations, customer needs, and competitive strategies, and use this information to create value for their customers and improve their bottom line.

If you're interested in learning more about Value Chain Analysis, be sure to check out our Value Chain Template developed by Michael Porter, one of the most influential thinkers in business strategy and competitiveness.

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