Before a product or service reaches the final consumer and soon after, a number of activities are involved. For example, prior to hitting the shelves of a high street retailer, typical activities involved include, research & development, purchasing of raw materials, production and storage of the product, marketing and then sales of the product and lastly after sales service, after purchase by the consumer. These activities have the potential to create long lasting customer value that will improve the competitive advantage of your organisation.
Competitive advantage is not just about matching or surpassing what your competitors are doing, but finding out the expectations of your customers, profitably meeting those expectations and even going one step further of surpassing them. Your organisation’s overall competitive advantage derives from the difference between the value you offer your customers and the cost of creating that customer value.
Since customers place a “value” on the product or service that your business offer, it is essential that you understand the sequence of business activities by which, from the perspective of the end user, value is added to your products or services.
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. 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 example, 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. There should be co-ordination for customer value to be maximised.
By undertaking Value Chain Analysis, your organisation can benefit from:
• 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, it also allows your organisation to establish the cost drivers of each process. This then allows for cost improvement strategies to be implemented whilst at the same time not lowering customer value. The organisation will then be able to identify areas with lower cost of access to raw materials, distribution channels or innovative process technology.
• 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 are able to 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 and competitive advantage
• 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.
A big 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 proposition.