Understanding Value Chain And It’s Importance To Businesses
If your business motives consist of a desire to be ahead of competition, then it is important for you to be fully acquainted with one of the business world’s most prominent tools: the value chain analysis
Value chain analysis depends mainly on the fundamental economic principle of advantage. Companies operating in sectors are in a position to be better served as they possess a relative productive advantage in relation to their competitors. At the same time, companies should be in a position to explore all available options enabling them to offer the best value to their potential customers.
In order to proceed with a value chain analysis, the company begins by thoroughly examining its production process and locating which procedures could be eliminated or improved. Identifying improvements of this sort can contribute to either a cost reduction or enhanced productive capacity. Finally, this would mean that customers gain the most advantage from the product for the lowest cost and this will further enhance the company’s reputation in the long run.
The Meaning of a Value Chain
Before any business can embark on a value chain analysis, it should have sound knowledge of what its value chain actually is. A value chain comprises of the complete range of activities such as production, design, marketing as well as distribution. In other words, all those activities which companies must go through in order to fully manufacture and deliver a product or service. Companies which are responsible for the production of goods will have a value chain commencing with the raw materials being used to manufacture their products and then every other thing that is added to it until it is ready for sale to consumers.
The whole procedure of organizing all these activities in order for them to be analyzed properly is known as value chain management. The aim of value chain management is to ascertain sound communication between all those responsible for each stage within the value chain, thus ensuring timely and efficient delivery of the product to all potential customers.
Porter’s Value Chain
Michael E. Porter was the man to first introduce the value chain concept. He has fully discussed the concept of a value chain in his book “Competitive Advantage: Creating and Sustaining Superior Performance”.
Porter’s viewpoint is that all the activities in an organization bear the responsibility for adding value to the service and products manufactured by that company. Therefore, they should operate at an optimum level in order for the organization to attain a real competitive advantage. Proper running of these activities should ensure that the value acquired will be higher than their operating costs; customers should be willing to return and freely transact with the company.
Porter, in his book, informs us that a business’s activities comprise of two categories, namely primary activities and support activities. Primary activities refer to the following:
- Inbound logistics: this is information regarding the receiving, hoarding and distributing of raw materials being used within the production process.
- Operations: this phase refers to raw products being transformed into the end product.
- Outbound logistics: this being the distribution of the end product to potential customers.
- Marketing and sales: this very important stage refers to activities such as advertising, sales-force organization, promotions, choosing distribution channels, setting prices, and managing customer relationships of the end product in order to gain proper consumer group targets for it.
- Service: This is a reference to all those activities which are necessary for the maintaining the product’s performance after it has been launched. This involves training, installation, repair, after-sales services, and warranty.
The support activities aid the primary activities and are as follows:
- Procurement: The procedure of gaining raw materials for manufacturing the product.
- Technology development: technology usage for developing the product, research involved during this stage, new product designs, and process automation.
- Human resource management: this involves proper employee hiring and retention in order to ensure adequate designing, building, and marketing of the product.
- Firm infrastructure: this is what is meant by an organization’s structure, management, accounting, finance, planning, and quality-control systems.
Aims and Results
Value chain analysis should be a sure way of assisting your company in locating areas which can be clearly optimized to ensure maximum profitability as well as efficiency.
Experts believe that the best outcome of a sound value chain analysis comprises of the following:
- Important short as well as medium-term final market opportunities within target value chains.
- Reasons responsible for hindering the optimization of these opportunities (for small-scale businessmen, women, youngsters etc.).
- Developing techniques to deal with these hindrances and enhance opportunities.
- Civil society, public and private sector entities to collaborate with in order to attain upgrading techniques.
- Suggestions emphasizing the maintenance of value chain upgrading techniques which are endearing to gender equality or help in enhancing the quality of nutrition (if applicable) and are representative of the poor and other discriminated classes of people.