Increasing competitiveness means that companies have to constantly re-evaluate their competitive advantages and what value they deliver to their customers. A value chain can help provide these answers.
But what exactly is a value chain?
A value chain is nothing more than a diagram showing the activities of a company. This strategic tool was created by Michael Porter in 1985 and it allows you to better understand your business. It helps to create a competitive advantage, delivering customers greater value at the lowest possible cost.
To understand a little better how it all works, let’s look at the main elements of a value chain:
Primary activities are those directly linked to the manufacturing, sale and transportation of the product to the customer. They are divided into five categories:
- Inbound logistics: this consists of activities related to the receipt and handling of raw material inventory.
- Operations: this stage includes everything related to equipment, assemblies, product packaging, maintenance of facilities and other value creation activities- that is, activities that transform raw materials into finished products.
- Outbound logistics: this includes activities related to the delivery of products or services to the customer, including collection, storage and distribution systems.
- Marketing and sales: this includes activities that allow customers to get to know the product or service and make the purchase.
- Services: this includes activities that increase the customer’s perception of value of products or services after purchasing. This includes installation, support, training and update services, among others.
These are activities that support the primary activities and that help to provide an advantage over competitors. They are divided into four categories:
- Company infrastructure: these are the support systems necessary for the company to maintain its operations. Some examples include the legal, financial, accounting and quality management sectors.
- Human Resources Management: these deals with all activities related to the hiring, training, retention and remuneration of the workforce.
- Technology development: these are activities that support the value chain, such as research and development, process automation, design etc.
- Purchasing: these involve the acquisition of the necessary resources so that the company can operate: acquisition of raw materials, services, machinery and office supplies, among others. This also includes finding suppliers and negotiating the best prices.
According to Michael Porter, primary and support activities can be represented in the diagram below.
Now that you know what it is and what the main elements of a value chain are, learn more about the main steps to build a value chain.
1. Identify the breakdown of primary and support activities
Identify the activities that are necessary for the creation of the product or service provided by the company. They are divided into three subcategories:
- Direct activities: these are activities that deliver value without depending on another activity in the chain; for example: sales and advertising.
- Indirect activities: these are activities that assist in delivering value so that direct activities can take place smoothly; for example: managing the sales team and maintaining customer records.
- Quality assurance: these activities ensure that direct and indirect activities meet required quality standards.
Identify the sub-activities that create value within each primary activity; for example, how the human resources department can add value in logistics, operations etc.
As in the previous step, direct, indirect and quality assurance activities should be identified.
2. Analyze the value and costs of identified activities
To carry out this step, it will be necessary to obtain the help of your collaborators and reflect on the ways in which each activity adds value for customers and the business in general.
Following this, compare the activity with the competitive advantage you are trying to achieve (leadership or cost differentiation, for example) and see if it supports the goal. To complete this step, ask questions like:
- Is this activity labor intensive?
- How much does raw material X cost?
This will help to identify which activities are profitable and which are not.
3. Identify connections
In this step, all connections between previously identified activities should be highlighted. This process usually takes some time.
4. Look for opportunities to increase value
Once the steps above have been completed, it is important to determine which activities should be optimized or improved to maximize the value you offer your customers.
Finally, it is important to keep in mind that your organization’s value chain should reflect business strategies. It must be clear in terms of the characteristics that differentiate you from your competitors, or it must have a lower cost structure. Then, once the previous steps have been completed, you should have a long list of change proposals to prioritize, focusing on those that most impact the customer, ensuring that they add value.