The value created by Businesses have to be evaluated due to the continuous increase in the competition for exceptional products, customer loyalty, and unbeatable prices. This is value chain analysis. Value Chain Analysis (VCA) is among the valuable tools that offer businesses an added advantage over their many competitors.
In this article, we have analysed the meaning and examples of Value Chain Analysis. Read on and learn.
What is business value chain
A business value chain is best defined as the activities that a firm operates in an industry to deliver valuable services or products for the customers. Some of the activities include distribution, design, marketing, and production. If a company deals with the production of goods, then the value chain will have to commence from the raw materials that were used to make the company’s products. In clear words, they should consist of all that was added in that product before being delivered to the market.
What is the ‘value chain management?’ it is the process or the act of organizing value chain activities so that you can analyze them well. The main objective is to establish communication between leaders of every stage so that the product can be delivered to the market seamlessly. Read on to understand how to do a value chain analysis.
Michael E. Porter’s industry Value Chain Analysis
Michael E. Porter, a former student of Harvard Business School introduced the Value Chain Analysis concept. He also developed ‘5 forces model’ that are used to show where businesses are ranked in current market competitions. Porter discussed the concept of value chain in his ‘Competitive Advantage: Creating and Sustaining Superior Performances’ book.
Competitive advantage cannot be understood by looking at a firm as a whole. It stems from the many discrete activities a firm performs in designing, producing, marketing, delivering and supporting its product.
He continued by writing that,
Each of these activities can contribute to a firm's relative cost position and create a basis for differentiation.
In Michael E. Porter’s book, business activities have been split into 2 (two) categories: Support activities and Primary activities. Support activities
These activities aid primary functions. They comprise of:
- Firm infrastructure – it is the planning, management, structure, finance, quality-control mechanisms, and accounting.
- Procurement – this is how a firm obtains its raw materials.
- Human resource management – It includes all the activities that are involved in retaining and hiring proper employees that can help in the building, marketing, and designing a product.
- Technology development – It is mostly useful in the development and research stage; how products are designed and developed, and the process of automation.
How to conduct Value Chain Analysis
The ‘Strategic Management Insight’ offers 2 Value Chain Analysis approaches: differentiation and the cost advantage.
1. Differentiation advantage
The first priority of a business is to ensure that it identifies the activities that create the best value to the market or consumers. Some of the activities include answering customer calls fast, using the relative-marketing strategies, trying their best to meet their targeted customer’s expectations, and being aware of systems and products.
The second priority should be evaluating strategies to boost the value. In order to improve the activity value, a business should focus on offering incentives, customer service, adding extra product features, and increasing options so that they can customize services or products.
Finally, the business should be able to identify the differentiation that adds and maintains the best value.
2. Cost advantage
We believe that the business has already identified the support and the primary activities; they should also identify their cost drivers. If you prefer the labor intense activities, then you have to include wage rates, work hours, and how fast it takes to complete work.
After that, the business should be able to identify the links that are between activities; they should know where costs are decreased in an area so that they can decrease in all the areas. By now, a business can easily identify gaps to lower the costs.
Value Chain Analysis objectives and outcomes
The CGMA (Chartered Global Management Accountant) discusses the essentials of VCA (Value chain analysis).
Some of the benefits include aiding the organizations to identify areas that they should improve, helping them to boost their awareness of the main capabilities, aid them to be aware of how their competitors create their value, and aid the organizations when it comes to deciding if they should outsource or extent particular activities.
Where do businesses commence? Well, they should first identify all parts of their production process, they should note the steps to get rid off, and do whatever thing that can make the improvements possible. All these will help the businesses to determine where the greatest customer value lies so that they can improve or boost it resulting in enhance production or cost saving. At the end of the day, the customers will definitely enjoy improved and high quality products, which will be at a lower rate.
Value chain examples
Most industries find value chain concept to be very useful. It makes the industries to be more aware of global, social, and cooperative information. Here are some value chain examples;
Example 1 – Delivery service
For a business to increase its consumers as well as the brand loyalty, it has to invest and emphasize in their employees development via incredible infrastructure improvements and human resources initiatives.
Example 2 – Retail
When a business performs the concept of analysis constantly, they tend to lower their prices for the sake of their customers. They can regularly evaluate their supplies, and maybe integrate in-store.
Value chain analysis diagram
Here is a diagram that best explains the concept of value chain analysis.
Value chain analysis is a valuable tool in all the business that require an added advantage over their many competitors. The concept enables a business to identify those areas that require to be optimized for profitability and maximum efficiency. This will result to keep your targeted market secure and confident making them to stay loyal to the business. All businesses should evaluate and analyze product quality as well as the services effectiveness along with the cost in order to improve.
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