What is a value chain?
A value chain is a method developed by Michael Porter of taking in materials and step-by-step adding value to them through various methods, backed by support structures, in turn delivering a more profitable, more valued product to the customer (Investopedia 2016). Unlike a supply chain which looks up toward suppliers to gain value, a value chain seeks to create value for the customer (Weiner T. 2014).
What are the key functions and core structures in business?
Key Functions include:
Inbound logistics
- Coordination suppliers; receiving & warehousing raw materials; managing inventory
Operations
- Refining raw materials into customer ready market offerings (i.e. manufacturing); assembling
- Packaging
Outbound logistics
- Delivering finished products to distributors, resellers, franchises, branches or the like
Marketing & Sales
- Marketing
- Advertising
- Pricing, the 4 P’s
Service
- Maintenance or service programs
- Customer service or customer retention programs
- Repair or warranty service
Alongside theses five key points of Porter’s value chain are activities designed to support and maintain the organization. These can be categorized as:
Firm infrastructure or organization
- Management
- Accounting
- Operations
Human resources
- Recruitment and termination
- Training and employee retention
- Benefits management
Technology
- Research and development
- Automation
- ICT
Procurement
- Purchasing of raw materials
What strategic analysis is needed for creating value?
There appear to be two general types of analysis for gaining value from a company’s value chain model. This first thing an organization would do to create and capture value is to determine what kind of competitive advantage they are seeking. These two competitive advantages can be described as “cost advantage” or “differentiation advantage”. If a company seeks to gain market share through cost management it will need to go through a five step process.
- Finding the organization's core and supporting functions and how they form a hierarchy in relation to the value chain, not necessarily to how the company itself is structured.
- Determine the cost and value of each function in direct relation to the cost of the product.
- Identify the cost drivers for each of these necessary functions (i.e. the parts of each function that are cash intensive.)
- Examine the relationship between each of these functions to determine if change in one function may lead to positive or negative changes in another.
- Find opportunities for for cost savings with the information gathered
On the other hand, analyzing with differentiation in mind is a different beast entirely. This process entails the following steps:
- Understand the point in the value chain that bring forth the most value for the customer
- Weigh different approaches to provide more value for the customer
- Seek out the viable differentiation
(Jurevicius 2013)
What are the methods to improve the efficiency of an organization?
After thoughtful analysis of the organization’s value chain and determining whether to seek a cost competitive strategy or a competitive strategy based on differentiation, an organization must seek out methods of improving efficiency. One method may be vertical integration at either ends of the value chain to mitigate costs in production or distribution and sales (Quickmba.com 2016). Organizations should adopt a long term, company wide efficiency mindset, rather than treating it as a temporary initiative (Weiner T. (2014). Other methods could include standardization of processes, cutting down on labor intensive activities. There is no one size fits all method, but an individual balance of deliberate, well informed strategy and a congruent culture will improve any organization.
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