( Value Chain Analysis )

Value Chain Analysis is a useful tool for working out how you can create value for your customers.

In business, we're paid to take raw inputs and to "add value" to them by turning them into something of worth to other people.

This is easy to see in manufacturing, where the manufacturer "adds value" by taking a raw material of little use to the end-user (for example, wood ) and converting it into something that people are prepared to pay money for (e.g. table). But this idea is just as important in service, where people use inputs of time, knowledge, equipment, and systems to create services of real value to the customer. And remember that your customers aren't necessarily outside your organization: they can be your bosses, your co-workers, or the people who depend on you for what you do. Now, this is important: in most cases, the more value you create, the more people will be prepared to pay a good price for your product or service, and the more they will keep on buying from you. On a personal level, if you add a lot of value to your team, you will excel in what you do. You should then expect to be rewarded in line with your contribution. So how do you find out where you, your team or your company can create value? This is where the "Value Chain Analysis" tool is useful.

Value Chain Analysis helps you identify how you create value for your customers, and then helps you think through how you can maximize this value: whether through wonderful products, great services, or jobs well done. Value Chain Analysis is a continuous process of gathering, evaluating and communicating information for decision making and will help you to identify all the value-creating activities and processes within your organisation.

Michael Porter introduced the generic value chain model in 1985. The value chain represents all the internal and external activities a firm engages in to produce goods and services.

BY using VCA, you will be able to identify the primary activities and support activities by which your organisation creates value. The primary activities are directly related to production, sales, marketing, delivery and service.

They take the form of inbound logistics, operations, outbound logistics, marketing and sales and after-sales service.

However, these primary activities will not work on their own. They need a helping hand from the support activities to fully maximise customer value. Examples of support activities include procurement, technology development, human resource management and organisational infrastructure. For instance, for operations to convert the resource inputs into a final product, they need the support of procurement who will purchase the resource inputs from the suppliers.

Also, for operations to produce a product of the exact customer specification, they need the support of the Human Resource Management who will recruit, train and develop people capable of operating the IT to design the products and improve processes through automation. However, you should know that activities that add value do not stop at your organisation’s boundaries. As there are many players in the value chain, for example, suppliers, retailers/distributors, customers etc, this creates linkages within your organisation’s value chain and theirs.

Linkages connect the activities of the value chain and activities in the value chain affect one another. Understanding this interdependence between various members of the organisation value chain is crucial for the ultimate satisfaction of the customer.

By undertaking Value Chain Analysis, the organisation can benefit from: ● Differentiation: Through VCA, your organisation will able to compare its activities with those of its competitors. Through the comparisons of your actions with those of your competitors, you can focus on the customer’s perceived value of the products and services, evaluate differentiation strategies, for example, product features, marketing channels, pricing, service support etc; for enhancing customer value. This will, in the end, help your organisation find innovative ways to perform value-creating activities, resulting in improved overall performance. ● Low-Cost Advantage: Value Chain Analysis enables your organisation to identify those profitable value-creating activities and those which are not. By assessing value-creating activities, also allows your organisation to establish the cost drivers of each process. This then allows for cost improvement strategies to be implemented while at the same time not lowering customer value. The organisation will then be able to identify areas with a lower cost of access to raw materials, distribution channels or innovative process technology. ● Identification of Core Competencies and Activities: Through VCA, an organisation will be able to identify those value-generating activities and their cost drivers. By reducing the cost of individual value chain activities or by reconfiguring the value chain, the organisation will be able to create a cost advantage. The most advantage is that the value chain is a very flexible strategy tool for looking at your business, your competitors and the respective places in the industry’s value system. It helps you to understand the organisation issues involved with the promise of making customer value commitments and promises because it focuses attention on the activities needed to deliver the value offered.