Being competitive in today’s marketplace means doing more than the other guys. You need to deliver value that exceeds customer expectations, and it’s critical that you only ever perform activities which add value to your final product. This is what value chain analysis is all about, and if you’d like to learn a little more this course is a great introduction as to why it’s beneficial to put your customers first.
Within an organization the value chain is simply all the activities which are performed internally as they transforming raw inputs into finished products. It’s that simple, but this concept is the core of why you are in business. If you don’t know your core process already, this course is great to run through as you create a compelling value proposition, which basically means, why should someone buy your product, over a competitors?
Michael Porter first introduced the concept of the value chain in 1985, and your goal while you are analyzing it is to identify where you can improve and grow your competitive advantage. As you look into all of your processes, you’ll find where your advantages and your disadvantages lie, and then it’s your responsibility to capitalize on them. If your goal is to differentiate, then your overall value goal is to perform all of your activities better than your competition. If you’re looking to compete on cost, you need to perform all of your activities at a lower cost than your competition. As an example, most of the competitive advantage derives directly from technological improvements and innovations, so for a company seeking differentiation, their most important activities are definitely going to be R&D.
Performing a Value Chain Analysis
There are typically two types of competitive advantage that are striven for, cost and differentiation.
To gain a differentiation advantage:
- Identify the value creating activities for the customer, and focus on the specific actions that create the most customer value.
- Evaluate the differentiation strategies to improve value to the customer, such as adding more product features, putting an emphasis on customer service responsiveness, increase the ability to customize and tailor the products, and offer a range of complementary products that enhance your overall product mix
- Identify the best differentiation method that is sustainable long term, which is often a mix of many different activities to promote delivering a higher customer value. The right combination will give you a sustainable differentiation advantage.
To gain a cost advantage:
- Determine the primary activity of the company, and all the support activities performed
- Look at each activity (back to even receiving the inventory, marketing, sales, and after sales support) and clearly identify each, and make sure they are separate from each other.
- This step is difficult, as it requires a strong knowledge of an organizations value chain, and often the value chain activities are not organized in the same way as the company is.
- Analyze how the work is done surrounding every separate activity, and identify how it adds customer value
- Rank each activity in terms of relative importance to the total cost of the product
- Investigate all of the costs of producing the product or the service behind each activity
- Here you can use activity based costing to calculate specific costs at each process step
- Address any major sources of cost, or areas where you are lacking (i.e. more expensive than your competitors)
- Identify all of the cost drivers, for every activity. You need to understand these before you can work at improving them.
- Identify if there are any links between the activities, because reducing costs in one may lead to further cost reductions in another.
- Identify opportunities where you are able to reduce costs. Once you know these, you can make plans at improving each and every one.
In business, the more value you can create, the more your customers will be willing to pay a good price for your products and services. If you exceed the value that all of your competition provides, your clients will continue buying from you. But how does this all apply in practice? Let’s take Starbucks as an example.
- Inbound logistics: This refers to the agents of the company purchasing coffee beans in Africa, communicating the importance of quality standards in the coffee beans and building strategic partnerships with suppliers.
- Operations: Starbucks is currently in over 50 countries, with both direct stores operated by the company and licensing deals.
- Outbound logistics: The normal process is Starbucks selling their products in store without any intermediaries. Recently, there are now retail products available in select supermarket chains.
- Marketing and Sales: There is no heavy investment in marketing, but specials and tastings are common, especially when new stores open.
- Service: One of their main objectives is to provide superior levels of customer service.
- Infrastructure: This is all of the general activities that are required to keep the stores operational, like management, finance, legal support and government relations.
- Human Resources: There are a wide range of training programs available for staff, who are considered to be one of Starbucks most important resources.
- Technological development: They make use of technology to save costs, and deliver a consistent tasting coffee, anywhere in the world.
- Procurement: All the purchasing that is required to produce the end products, like the coffee beans, raw food items as well as the buildings, and machinery.
Based on the mix of activities above, Starbucks has capitalized on an international demand for delicious coffee, that has guests coming back again and again to experience the superior levels of service, and a coffee that always tastes great. If you’re interested in focusing on customer service, this recent post outlines many great ways that you can improve your own organizations customer service.
As another example, let’s look at the value chain of Pizza Hut:
- Inbound logistics: This includes all of the sourcing activities to procure and standardize all of the produce, ingredients and materials to bake pizza’s fast, consistently, and delicious – in house. They capitalize on economies of scale, and use massive global purchase orders to source the best prices on raw products for their restaurants.
- Operations: By targeting areas where there is an affinity for Italian food, Pizza Hut operates in a huge number of countries globally with a licensing model where stores are managed by a local franchise owner.
- Outbound logistics: There are two models that Pizza Hut capitalizes on, in store dining and their home delivery service.
- Marketing and Sales: There is a large investment in marketing to drive additional sales, and compete with the other fast food chains.
- Service: The entire goal of Pizza Hut is to offer value to their customers in affordable and convenient pizza that everyone can enjoy.
- Infrastructure: Again, this includes every other activity that is required to keep the stores in business, such as finance, legal, etc.
- Human Resources: To keep the costs down staff are typically junior, and unskilled.
- Technological development: The process they have created to have unskilled chefs cooking the pizza is their biggest asset. Breaking down the complicated method into simple steps that can be repeated again and again for consistently great pizza.
- Procurement: The purchasing and activities required to produce the pizza, the raw food, and all of the buildings, and equipment needed to cook and deliver the pizzas.
Based on these activities, Pizza Hut is leading the market in producing pizza that is both affordable, and can be delivered to your door in under 30 minutes (in most cities). This convenience is what sets them apart from many other competing options for meals, like going out to dinner or preparing a meal at home yourself, and they use a strong campaign and marketing focus to entice customers to use them over similar competitors in the fast food delivery industry.
Take the steps outlined above and apply the same methodology to your company. Are you competing on a cost basis, or are you targeting a differentiation strategy? If there are any customers that you can rely on for feedback, it is also worthwhile to present your conclusions to them from your own analysis, to either confirm you’re correct, or to get an even better understanding of what it is that they want. If your business is in the tech industry, or primarily online, you can still create value for customers, this course offers a great insight in how to identify your internet value chain.
Doing a value chain analysis is a fantastic way of following a process to review all of the ways you can generate value for your customers. When you review all of these in detail, you’ll find that you come across many different ways you can satisfy your customers even more. If it’s your first time performing this type of analysis, this course is perfect to teach you the project management skills you need in value chain analysis. Building on this, all you really need to do is take action and make a plan on the changes that are needed within your production process.
Very soon you be excelling in all the things that really matter to your customers. That’s when you’ll have real success!