Today’s market is more competitive than it has ever been. The competition has expanded to include additional criteria, and value ranking is no longer restricted to quality and price. To build a name for oneself today, your business must accomplish overall competence. But how can you tell if your company operations are giving your clients the greatest value while still making a profit? What is the plan for generating value for both consumers and shareholders? The value chain is an important idea to understand.
Every question about how a company creates value for its customers and itself is answered by the value chain. It’s a good method for assessing corporate operations and identifying opportunities for innovation. But what is a value chain, and how do you build one?
What is a value chain?
A value chain is a set of operations that an organization does in order to produce and distribute value to its consumers. It gives a business a competitive edge by alleviating clients’ problems and giving them exactly what they desire. It encompasses all processes involved in bringing a product from concept to reality, from the moment raw materials are procured through the time the product reaches its final customer.
Now we need to figure out what customer value is.
Customer value refers to the monetary advantages that a customer receives in exchange for the price paid for a market item. A corporation executes a sequence of operations to develop and provide this “value,” which is referred to as a value chain. In 1985, Harvard Business School professor Michael Porter coined the term “value chain.” In his landmark book Competitive Advantage: Creating and Sustaining Superior Performance, he visualized and analyzed the notion.
Now, let us understand the value chain with respect to the supply chain
Value chain vs supply chain
The supply chain and value chain are two mechanisms that help get things from the drawing board to buyers’ hands. As a result, they are frequently misunderstood to be the same notion. Both of them, however, take a different approach to the process and have distinct objectives.
The key difference between a supply chain and a value chain is that the former does not provide value. The major role of a value chain is to add value to the commodity so that it may be given to the consumer, whereas the main function of a supply chain is to transport a commodity or material from one firm to another. Operational management gave birth to the supply chain idea, while business management gave birth to the value chain notion.
Supply chain management is the practice of planning and controlling supply chain activities. This multi-functional system seeks to provide 100% client satisfaction. The ultimate purpose of a value chain, on the other hand, is to provide a company with a competitive advantage by boosting productivity while keeping costs low. It does it by analyzing value chains.
Supply chain = supplying products
Value chain = delivering value
We can explain it in more detail using Porter’s Model of the value chain:
Porter’s value chain model investigates the mechanisms that change inputs into outputs. It considers a business to be a series of value-creating activities. Porter utilized the notion to show how companies add value to their basic resources in order to develop goods that are then sold to customers. As a result, maximizing value at each step of a company’s activities is critical. He illustrated a chain of operations that all firms had in common, which he separated into primary and support activities. Businesses employ these actions as “building blocks” to create a worthwhile product or service.
Value Chain finance is different from supply chain finance in that it focuses on providing financing to small and medium-sized enterprises (SMEs) and micro, small, and medium enterprises (MSMEs). It also differs from supply chain finance because it doesn’t just offer loans; it also offers equity investments and other forms of financing that can help businesses grow.
Primary activities of the value chain
Primary operations create value and provide a competitive advantage to a company by addressing external demands. It encompasses all acts directly related to the manufacture and sale of a product, such as the purchase of raw materials, transformation into a finished product, delivery, marketing, and services.
- Inbound logistics
Internally, it includes the acts and procedures involved in obtaining, distributing, and storing items. It also entails partnerships with suppliers, which are crucial in generating value. Material storage, warehousing, inventory management, transportation schedules, and supplier returns are just a few examples.
All procedures involved in the transition of raw materials to the finished product are referred to as operations. Manufacturing, packing, assembly, equipment repair, testing, printing, and facility operations are all included.
- Outbound logistics
It comprises tasks such as collecting, storing, and physically delivering the finished product to the buyer. It also includes managing a company’s internal systems as well as exterior consumer-facing systems. Finished products warehousing, delivery truck operations, order processing, and scheduling are just a few examples.
Customers acquire completed items as part of marketing and sales efforts, and incentives are supplied to convince them to buy the company’s products. Marketing and sales involve activities such as advertising, branding, quotation, channel selection, channel relations, and pricing, all of which attempt to increase exposure, attract a marketing audience, and convey why a customer should buy a product or service.
It entails efforts aimed at preserving the value of items and enhancing the consumer experience. Add-on services, installation, warranties, refunds, and returns are all covered. After-sales service is equally as important as advertising initiatives.
Support activities of the value chain
Support activities are primarily focused on meeting internal requirements and serve as a supplement to primary activities. There are four support activities, and improving the efficiency of any of them enhances at least one of the major activities.
It covers the procedures for acquiring raw materials, tools, and other consumables, as well as machinery, laboratory equipment, and office equipment. It also includes activities such as locating suppliers and negotiating contracts for products and services.
- Technological Progress
At various levels of the value chain, technology is employed to gain a competitive advantage by improving productivity or cutting manufacturing costs. Machinery, hardware, software, protocols, cybersecurity, and technological competence are all part of technological advancement. Frequently, research and development teams are involved.
It entails tasks like training, building, motivating, and rewarding employees who will assist in the development, marketing, and distribution of the product in accordance with the firm’s business plan. Many businesses now have a Talent Management department inside HRM that recruits and trains the top graduates.
It refers to a firm’s support systems, which include functions that allow a company to execute its day-to-day operations. General (strategic) management, planning, finance, accounting, legal, government relations, and quality management are all part of it. The equation that leads to margin computation includes these parts of a value chain. What are the margins now?
Margin is the term used to describe the revenue generated by the value chain.
Value chain analysis
Value chain analysis is a multi-purpose process that evaluates a firm’s major and supporting operations in order to understand expenses, identify activities that contribute the greatest value, and differentiate the organization. It tries to help a company gain or maintain a competitive edge by finding areas where efficiency and profitability may be improved in order to raise profits.
What Is A Value Chain Analysis And How Does It Work?
Value chain analysis requires study and might take a long time to accomplish. It can, however, help a corporation accomplish certain milestones. The following are some of the steps required in generating a value chain analysis.
Identifying value chain activities
The initial step is to identify each value chain stage. In the case of primary activities, a corporation should identify value-adding sub-activities. Companies should identify sub-activities that provide value to each major activity when it comes to supporting activities.
This entails identifying direct activities (those that generate value on their own), indirect activities (those that assist direct activities in running smoothly), and quality assurance (activities that ensure that direct and indirect activities meet the required standards).
Identifying And Analyzing Activity Costs And Values
The following stage is to assess the value that each action adds to the process, as well as the expenses associated with it. Is this a time-consuming activity? What does the raw material cost?
A corporation may evaluate which procedures are cost-effective and which are not by asking comparable questions. When it comes to value, it’s important to think about it from the consumer’s point of view. Are the materials used in the construction of a product more durable or luxurious for the user? If a corporation has a specific characteristic, would it profit from network effects and greater business?
Advantages of the value chain
The value chain assists firms in identifying and evaluating cost-cutting opportunities, both good and negative, and helps them in a variety of ways.
- Increases profit: Because effective logistics and distribution, it can increase a company’s profit margins. Consumer value is increased, and duplication is reduced, resulting in the maximum potential income for the company. Apple’s marketing and after-sales services, for example, attract more customers and encourage them to buy more expensive things.
- Enhances the offering’s quality: It has the potential to raise the market’s quality and make it more competitive. Due to intense competition, continual examination of primary and support operations, as well as knowledge of consumer tastes and preferences, increases product quality.
- It helps to minimize a company’s cost by removing items that cost more or take up too much of an employee’s time, resulting in less waste and higher brand awareness. It also enhances a brand’s image by continually providing value to customers and seeking both distinction and cost savings.
- Increases long-term adaptation and sustainability: It may improve a company’s long-term adaptability and sustainability while also adding value to its services. This may be accomplished by mapping the value chain process and removing menial tasks that do not add to the end result.
Disadvantages of the value chain
Although there are several advantages to doing a value chain analysis, there are also some substantial negatives, since operations that aim to improve labour efficiency and create value while lowering costs can have certain drawbacks.
- Loss of target: If too much attention is devoted to microdata, the greater strategic picture may be lost. Although the goal of a value chain analysis is to examine a company’s operations section by segment, it’s easy to lose sight of how the many events connect in general.
- Difficulty in constructing chains: Although value chain analysis is done in phases, it is a challenging undertaking to create. The data collecting process is long and laborious, assessing what adds value or does not might be subjective (due to inappropriate consumer behavior), and implementing the strategy can be time-consuming and labour-intensive.
- Costs of implementation are high: Because competition never ends, value chain analysis is a never-ending process that requires continual benchmarking to stay one step ahead of the competition. For a company that has never done value chain analysis before, the implementation costs might be rather costly.
- It might be tough to keep the process running: designing a value chain is only half the fight. It may consume so much time that employees are unable to focus on other activities.