Value Chain Analysis: An Internal Assessment of Competitive Advantage
A business is essentially a series of tasks carried out to create, manufacture, promote, send, and support a product (or service). Its objective is to create the goods such that they are more valuable to buyers than it originally cost to make them. The additional value, which is sometimes denoted as “margin,” can be thought of as the profits. When investigating the sources of competitive advantage, it is essential to examine all of these internal processes in a methodical manner to see how they interact. A business achieves competitive advantage by completing strategically significant tasks more affordably or effectively than its rivals. By breaking down a corporation into its strategically important operations, Michael Porter’s value chain aids in providing a clear picture of the internal structure. Managers are better able to determine where real value is produced and where changes may be made based on this overview. The value chain of one organization is a part of a bigger activity stream that Porter refers to as the Value System or as the supply chain. Suppliers develop and transmit the acquired inputs through a value chain (upstream value). On their journey to the consumer, many items also travel via the value chain of channels (also known as channel value). The value chain of a buyer eventually includes a company’s goods. The emphasis of this article is one organization’s value chain rather than the full supply chain (from suppliers to end consumers). Primary activities and support activities are the two main categories into which the value chain activities may be classified.
Primary activities
The first category is made up of the five primary activities. The real product is produced and sold as a direct result of all five actions. They encompass the actual production of the product, its sales, transfer to the customer, and post-purchase support. Inbound logistics, operations, outbound logistics, marketing & sales, and service make up the five main activities. All of these activities will be present to some extent in every business and contribute in some way to competitive advantage, even if the relevance of each category may vary from industry to industry.
Inbound Logistics
Purchased inputs, such raw materials, are frequently handled by inbound logistics. Due of this purpose, it also interacts with outside businesses like suppliers. Receiving, storing, and distributing product inputs are tasks related to inbound logistics. Examples include vehicle scheduling, returns to suppliers, inventory control, and material handling.
Operations
Operations can transform the inputs into the intended product once the necessary ingredients have been internally gathered. The utilization of manufacturing conveyor belts often occurs during this stage. Operations-related tasks convert inputs into the final product form as a result. Examples include manufacturing, packing, assembling, upkeep of machinery, testing, printing, and facility management.
Outbound Logistics
The finished product still needs to go to the buyer once it is produced. The goods may either be transported immediately or has to be held for a long, depending on how lean the organization is. Outbound logistics involves gathering, storing, and physically distributing the goods to customers. Storage of finished items, material handling, the use of delivery vehicles, order processing, and scheduling are a few examples.
Marketing & Sales
Producing goods does not necessarily indicate that there are consumers ready and eager to buy them. Sales and marketing are then involved in this. To ensure that potential consumers are aware of the product and are sincerely contemplating acquiring them, it is the responsibility of marketers and sales representatives. Therefore, the purpose of marketing and sales activities is to both create a way for customers to buy the goods and to encourage them to do so. Examples include price, channel selection, channel relationships, sales force, advertising, and promotion. The marketing funnel is a useful tool for organizing the complete marketing procedure.
Service
After-sales support is just as crucial in the modern economy as marketing initiatives. Due to the ease with which complaints from dissatisfied consumers may be disseminated online, the effects on your business’ reputation might be severe. Therefore, it’s critical to have effective customer service procedures. Offering services to improve or preserve the value of the product after it has been sold and delivered is what this value chain’s related activities include. Examples include setup, maintenance, instruction, supplying components, and product adjusting.
Support Activities
Support activities fall under the second group. Through the provision of acquired inputs, technology, human resources, and different firm-wide management functions, they cross the major operations and seek to coordinate and support each other’s duties as well as their own as effectively as feasible. Thus, the support activities may be classified into four categories: procurement, research and development (R&D) in technology, management of human resources, and business infrastructure. The dotted lines show how procurement, technological advancement, and human resource management may be linked to certain key operations as well as provide support for the complete value chain.
Procurement
Purchasing inputs utilized in the firm’s value chain is the function of procurement, not the inputs themselves. Every value-creating activity, including support activities, requires purchased inputs. Raw materials, supplies, consumables, and assets including machinery, lab equipment, office equipment, and buildings are all examples of purchased inputs. Therefore, procurement is required to support not just inbound logistics but also other value chain operations.
Technology Development (R&D)
Every value-adding activity incorporates technology, whether it is knowledge, processes, or machinery used in the process. Most businesses utilize a wide variety of technologies. The actions involved in technology development can be divided into attempts to enhance the product and the process. Examples include computerized bookkeeping, telecommunications technology, product design research, and customer service methods. Departments involved in research and development are often included under this category.
Human Resource Management
Recruitment, employment (and firing), training, development, and remuneration of all sorts of staff are all included in human resource management (HRM) tasks. Through its function in defining the skills and motivation of workers as well as the cost of hiring and training them, HRM has an impact on the competitive advantage of any organization. Some businesses, particularly in the technical and advisory service sectors, place such a high value on people that they have created a whole Talent Management division inside HRM just to find and develop the top university graduates.
Firm Infrastructure
The operations that make up a company’s infrastructure include planning, general (strategic) management, finance, accounting, legal, government affairs, and quality management. Typically, infrastructure supports the whole value chain rather than specific operations. Numerous corporate infrastructure tasks are frequently included as “overhead” charges in accounting. These actions might be one of the most potent sources of competitive advantage, thus they shouldn’t be undervalued. After all, strategic management frequently serves as the foundation upon which all other business choices are made. People on the work floor will find it more difficult to perform successfully if the wrong method is used.
Linkages within the Value Chain
The value chain is not a collection of independent activities, even yet value activities are the cornerstones of competitive advantage. Instead, it is a network of interconnected tasks connected by links along the value chain. One value activity’s decision (such those made in procurement) may have an impact on another value activity (e.g., operations). Given that procurement is in charge of overseeing the quality of the inputs that are acquired, it is likely to have an impact on operations costs for manufacturing, operations costs for inspection, and ultimately operations costs for product quality. Additionally, a well-functioning automated phone menu for clients (technological advancement) will enable consumers to speak with the appropriate support agent more quickly (service). Therefore, coordination across value chain activities and clear communication between them are just as crucial as the operations themselves. As a result, in order to gain a competitive edge, a corporation must also optimize these connections. Unfortunately, the management frequently misses these connections because they are so subtle. As a result, significant improvement possibilities are lost.
Value Chain Analysis in Sum
Porter’s Value Chain is a fantastic framework for analyzing the internal structure, at the end. It enables a more organized method of determining where genuine value is produced inside the firm and where expenses may be cut in order to increase profits. Additionally, it makes it possible to enhance departmental collaboration. An internal analysis may be started by fusing the VRIO Framework and Value Chain. If you’re interested in the complete supply chain, you might repeat the procedure by adding the value chains of your company’s suppliers and customers and positioning them in front of and behind the value chain of your own organization.
What are the benefits of a value chain analysis?
- Learn the fundamentals of the many procedures that your company employs and the reasons behind them.
- Determine any workflow bottlenecks that exist or might arise, as well as any additional inefficiencies.
- Aim to automate, outsource, or restructure jobs that can.
- Reduce waste and deprioritize or remove useless work.
Businesses may identify key activities, improve workflow, and boost efficiency using the insights they obtain from value chain analysis. These, in turn, lower expenses and overhead, boosting the company’s profit margins.
