Value Chain Analysis: Finding Areas of Opportunity
The value chain presents a systemic view of businesses, with inputs and outputs. Described by Michael Porter in his 1985 book, Competitive Advantage, this concept defines specific activities that organizations perform to make sure that their output (a product or service) is greater than the sum of their inputs, creating value. Reviewing the value chain can help you make your organization more efficient, giving you an advantage over the competition. By offering a bird’s-eye view of your business, the value chain can help you see how different processes interact and where improvements can be made.
Breaking Down the Value Chain
Manufacturers and distributors perform a seemingly countless number of tasks in getting their products to market—however, these can be broken down into primary activities and secondary activities.
Primary Activities: Essential Steps in Getting Your Product to Customers
The primary activities are the processes that are absolutely required for creating value. A competitive advantage can be created through the optimization of any of the following steps.
- Inbound Logistics
Inbound logistics refers to planning and organizing the inputs of the system. In this activity, a business acquires starting materials, parts, or products from suppliers and manages their transport to factories or warehouses.
Here, the business performs its main function in converting those inputs into valuable outputs. Its definition is as simple as your business’s role: in manufacturing, this is the creation of the product and in distribution, this is the service involved in making that product available.
- Outbound Logistics
Outbound logistics includes what a business does with a completed product: storing and shipping. A distributor’s role centers on outbound logistics, though this is the overall service a distribution company provides, which can be broken down into its own specific primary activities.
- Marketing & Sales
No one can buy your product or service if no one knows about it. Marketing and sales is about communication, promoting a business’s offerings so it can be purchased easily.
Service means following through after the product or service is delivered: making sure that the product or service works for the customer. This activity includes any process involved in providing strong customer experiences, whether that’s through installation, repair, training, or other ongoing support.
Support Activities: The Foundation in Creating a Strong Organization
Support activities facilitate the primary activities of the value chain. Imagine a chocolate-chip cookie: if the primary activities are the chocolate chips, the cookie dough is comprised of the support activities, providing an overall framework and structure. If the cookie dough has an exceptionally good recipe, it can enhance the flavor of the chocolate chips. In the same way, well-planned support activities can enhance the effects of the primary activities.
Every business needs resources so it can run. Procurement refers to getting the materials that support an organization’s functions outside of manufacturing or distribution.
- Human Resources Management
Human Resources Management involves any process as it relates to people who work for an organization. Those processes can include recruitment, hiring, development/training, compensation, and, if it can’t be avoided, dismissal.
- Technological Development
Some kind of equipment is needed for the primary activities to take place. This support activity relates to a business’s hardware and software as well as their technical procedures and knowledge.
Infrastructure ties an organization together. Processes that act as an organization’s infrastructure include general management and administration, accounting, finance, legal services, quality assurance, and government or public relations.
Value Chain Analysis
Outlining your business’s value chain is a powerful tool that can help you identify areas of opportunity, which can be through lowering costs or differentiating from competitors. Lowering costs can be accomplished by determining the financial investment involved for each primary or support activity. Then, this is broken down into clear, manageable expenses. One example could be in examining the primary activity of inbound logistics. Possible avenues for analysis in this case could be investigating where your supplies are from, how you purchase them, and if there’s a way to get a better price. Differentiating from competitors means identifying where your business can go above and beyond for your customers. An example here could be in analyzing the support activity of technological development. Is there new software that could streamline your processes, decreasing the amount of time it takes to get a product or service to the customer, supporting the primary activity of outbound logistics? Or is there another tool that can help your company provide better customer support, enhancing the primary activity of service? A manufacturer or distributor of any size can benefit from value chain analysis, and it’s a valuable asset to any strategic toolbox. By reviewing your processes as the direct or indirect (primary or support) transformation of inputs into outputs, you may gain new insights that were previously hard to pinpoint. Has your business done a value chain analysis that has led to strategic change? What changes did you make, and what were the results? Let us know in the comments.