Value chain analysis requires us to examine in detail the various activities within the business. Then, we evaluate them to see where and how businesses can create value for customers. It is useful to understand opportunities to add value or save costs, which in turn has an impact on customer satisfaction.
Every activity in the business should synergize with each other. Some may be directly related to product flow or customers, such as logistics, production, marketing, and customer service. Others support these activities to run efficiently and effectively.
What are the activities in the value chain?
Michael Porter gives us a fundamental framework through value chain theory. He divides business activities into two categories: primary activities and support activities. Each category includes several strategically relevant sections.
Porter’s value chain is becoming an important strategic management tool. It provides fuller insight into where your company should focus on adding value and saving costs.
The primary activities directly deal with products and customers. It involves shipping raw materials, converting them, selling and marketing products, and customer service. Here are the subcategories for the main activity:
- Inbound logistics is concerned with bringing inputs from suppliers to the company. It doesn’t just deal with transportation. But, it is also responsible for warehousing and related information flow.
- Operations are involved in processing inputs into outputs. Production systems can vary widely between businesses. Some are more labor-intensive and rely more on hands. Others are more capital-intensive and rely on expensive machinery and equipment.
- Outbound logistics is the opposite of outbound logistics, dealing with goods from companies to distribution channels and customers. It handles freight forwarding, warehousing, and related information.
- Marketing and sales are involved in market research, developing the marketing mix, communicating and delivering company offerings, and handling customer relationships.
- Service deals with providing value through services such as after-sales, repair, maintenance, and another customer service. It aims to ensure customers get satisfaction after purchasing the company’s products.
Support activities do not deal directly with product flow and with customers. However, they are strategic to support the main activities running effectively and efficiently. They include:
- Procurement deals with buying and acquiring goods and services from external sources. It is involved in purchasing goods, negotiating terms, receiving and inspecting goods to support day-to-day operations.
- Technology deals with information and technology within the company. These include those related to software and hardware, information systems, production technology, and process automation.
- Human resource management deals with people in the company. It is responsible for planning, recruiting, training, and developing employees. Managing the compensation system, industrial relations, and layoffs are other jobs.
- Infrastructure includes other functional activities, such as accounting, finance, legal, and general management.
How to analyze the value chain?
Analyzing the value chain helps your company to create value. Porter’s value chain above provides a framework for where and how your company is doing. The analysis involves three general steps:
- Examine-in detail your company’s activities
- Analyze opportunities to create value in each activity
- Evaluate and make further plans
Examine in detail the activities within the company
This stage aims to map the activities your company does. You then group them into core and non-core activities to focus on allocating resources and developing strategies.
The classification offered by Porter above is ideal. But, it will indeed vary between businesses, depending on the business processes in each. For example, small businesses may not involve as complex of activities as large businesses.
In this stage, you should make the details of the activities in a structured manner. I mean, you group them according to how they contribute and how significantly they contribute to creating value. Which ones contribute directly to creating value? And which one isn’t?
Next is to find relationships between them to strengthen synergies and allocate resources. For example, you want to build reliable logistics, allowing products to be delivered when needed at a lower cost. It doesn’t just require you to think about the logistics aspect. But, it requires your technology support to facilitate the efficient flow of information between factories, warehouses, stores, and suppliers.
Analyze opportunities to create value in each activity
This stage requires you to think about how you create value in each activity. You can focus on core activities first and then on support activities.
The two main aspects you focus on are: how to add value and how to save costs. It may, for example, require you to answer questions such as:
- Is the current delivery time of raw materials and output on schedule?
- How to build an efficient and effective flow of information?
- How to ensure goods are not damaged when shipped or in the warehouse?
- How to save raw material consumption?
- What production methods and technologies are appropriate?
- Is it important to automate production?
- How to achieve zero defects?
Marketing and service
- Should companies develop online channels?
- How to encourage customers to be loyal?
- Is it necessary to launch an affinity card or promotional gift?
- Is it necessary to offer free shipping?
- How to improve existing customer complaint services?
- Should companies rely on external distribution channels? Or, isn’t it better to develop your own channel?
The questions above are more general. For a specific value creation effort, it can vary widely between businesses.
Here is what Starbucks is doing to create value along the value chain:
- Creating a relaxed upscale environment to enjoy a drink
- Offers customized drink ordering
- Provide high-quality products and services to encourage promotion among customers
- Obtaining raw – unroasted – coffee beans directly from the plantation to ensure the best quality.
- Providing free Wi-Fi allows customers to make Starbucks stores a casual meeting place.
- Choose a location with high traffic and high visibility, making it easier for customers to visit.
Then, the ideal step for developing a value creation strategy is to look at the actual data. You relate it to the current state and the plans you develop. For example, you check how many complaints you received and how many repurchases by customers. Or, you check whether your advertising costs are correlated with the number of new customers. It aims to provide more objective insight and a more reasonable plan.
Evaluate and make further plans
After identifying the opportunities to create value, the next step is to develop an action plan. This stage includes identifying the current gap with the desired one.
This stage requires a wise move because it often consumes energy and requires large resources. Choosing the most vital, easy, inexpensive, and quick idea to do is the first choice. After that, you can take on more difficult ideas.
Moreover, it is more important to develop metrics to measure progress. For example, you develop a loyalty program. In that case, you can relate it to repeat purchases by existing customers.