Your company can create value along the value chain to gain a competitive advantage. And, then, scanning it regularly and making sure it’s relevant to customer requirements allows your company to continuously outperform your competitors, keeping the money flowing straight to you.
But, to create value, your company must map out what activities are involved along the value chain? Which ones contribute significantly to value creation? After that, you can think about how to add value to each activity.
Adding value enables your company to create economic value. Your company offers the highest value (satisfaction) to your customers at the lowest possible cost.
What are the activities in the value chain?
Let’s take Michael Porter’s value chain concept. He divided the value-creating activities within the firm into two groups: primary activities and support activities.
Primary activities include five components. And as the name suggests, they are strategic in adding value and creating a competitive advantage, requiring companies to focus on them. They include:
- Inbound logistics includes the delivery of inputs from suppliers to the company’s warehouses or production facilities. It involves receiving, warehousing, and managing inventory.
- Operations involve processing raw materials and other inputs into outputs. For example, it requires handling activities along the production line, depending on the production method used.
- Outbound logistics is the opposite of inbound logistics. It involves shipping goods from a company’s production facilities or warehouses to customers or intermediaries such as wholesalers and distributors, including handling information flow and warehousing and inventory management.
- Marketing and sales include scanning consumer needs and wants, competitive trends, and identifying targeted markets. Then, the team develops the appropriate product, runs the promotion, sets the price, selects the distribution channel, and sells the product. The team is also responsible for managing long-term relationships with customers.
- Services are involved in activities to ensure customers get the greatest satisfaction and benefit from its products after buying them. They include after-sales service, maintenance, repair, refunds, and customer complaint handling.
Support activities consist of four components. They play a role in helping key activities operate more efficiently and effectively. Therefore, their contribution and role will vary, depending on which core activity they support.
Here are four supporting activities in Porter’s value chain:
- Procurement involves activities related to the purchase and acquisition of inputs. It is not only about raw materials but also other inputs to run business operations such as office equipment, production machines, and technology equipment.
- Technology involves handling and maintaining technology for other business activities, such as production technology, information technology within the company and external parties, and customer relationship management.
- Human resource management involves recruiting, training, developing, motivating, and compensating employees. Handling industrial relations and layoffs is another concern. Thus, human resources are adequate to support strategies and other business activities, both quantity, and quality.
- Infrastructure covers functional areas such as accounting, corporate finance, legal, quality control, and strategic management.
Examples of creating value along the value chain
The primary and supporting activities make up the value system in a company. Companies then use it to develop value creation strategies, thereby enabling them to gain a competitive advantage. For example:
Your company can create value through highly efficient logistics activities. It allows your company to reduce shipping costs, thereby generating more profit.
On the other hand, your company can also speed up the delivery time of products to customers. So, your products are available when customers need them.
The selection of the right production system contributes to value creation and cost reduction. For example, the flow production method allows your company to produce standard products in high volumes and obtain cost savings through higher economies of scale.
On the other hand, mass customization methods also allow your company to meet the requirements and tastes of your customers at the level of mass production costs (combining product customization and mass production).
Promotional activities can create value for the company by encouraging more people to buy your company’s products. Your marketing team can also develop branding to encourage customers to be loyal and continue buying from your company, who are reluctant to switch to competitors.
And, finally, building strong customer relationships allows your company to continue to earn money by serving them satisfactorily.
Providing superior customer service can keep your customers satisfied and therefore continue to buy your products. It could be via, for example:
- Free product delivery service.
- Provide product marketing services at customers’ homes.
- Build effective services to handle customer complaints.
Choosing the right suppliers and cultivating long-term relationships with them is how companies create value. For example, your company can save money by getting a price discount. Suppliers are also happy to offer it to your company, hoping you will continue to buy from them.
In addition, a good relationship also allows you to get more lenient credit terms. It helps you in managing cash flow and maintaining liquidity.
There are various ways technology contributes to creating value. Its role is often attached to how it is used in each of the other activities.
For example, the production department’s mass customization method requires technological support to operate the machine through computer assistance. Likewise, technology also helps marketing build customer databases and profiles, real-time observing market trends, and providing software to deal with and handle customer complaints.
Technology also helps in the efficient and effective flow of information within the company and with external parties such as suppliers and customers. As a result, management can make the right decisions when needed because adequate information is available. For example, the marketing team can inform the production team about when to increase production. Likewise, technology also helps build billing and ordering systems with customers and suppliers.
Human Resource Management
Quality human resources make a vital contribution to the value created by the company. It requires proper hiring, training, development, and compensation to motivate and make employees more proficient in their functional jobs.
Motivated employees are more productive, allowing your company to get more output without incurring increased costs.
Likewise, your company can satisfy customers and reduce their complaints by choosing the right people to interact with them. For example, your sales force can generate more sales if customers are satisfied with the way they offer and persuade customers to buy. Likewise, if your staff handles customer complaints effectively, it minimizes the bad impact on your company’s reputation.
Take the accounting and finance department, for example. The way your company collects payments from customers also affects their satisfaction with your company.
Another example is by giving a discount. When your company’s profit target has been achieved, and financial conditions allow, the accounting and finance department can inform the marketing department to give discounts to customers as company appreciation for them.
One more thing, companies can also save costs by achieving an optimal capital structure. For example, deciding whether to borrow from a bank, issue bonds, or issue stock can affect your company’s financial costs.
What to read next
- Value Creation: Definition, Shareholder Value, Customer Value
- 6 Benefits of Creating Value for Customers
- How does your company create value along the value chain?
- Added Value: Definition, Why It Matters, Formula
- Why is adding value important for a business?
- Value Added Formula and How To Calculate It
- Value Added: Meaning, Formula, Importance, Way to Create