Once a business has established a strategy and direction, management must address supply and demand relating to getting their products to the market. The managers must appreciate the markets, customers and demographics that the business wishes to serve. One of the best ways to do this is to develop and integrate a value chain.
There are several models of value chain analysis. The most common model in the text we have reviewed is Porter’s Value Chain, which looks at primary and support activities/processes that are needed to get a product physically to market. The primary processes in Porter’s model are: inbound logistics, operations, outbound logistics, marketing/retail activities and finally servicing the customer. These primary processes are supported by secondary activities, which are: the firm’s infrastructure, human resources, technology and systems development, and procurement. The model is often depicted as below.
Porter’s Value Chain
With regard to the Porter’s Value Chain analysis model shown above, the steps can be analysed in the following way:
These are the systems and processes involved with the purchase, receipt, transportation and storage of a product or raw materials. Here the transport arrangements e.g. time and number of deliveries are key. Transport is often arranged by the supplier, so working with them to get the best results is key. Often, companies do not communicate and instead assume what the other organisation wants. We urge detailed communication at the point of negotiating contracts. If you would like delivery by midday or twice daily deliveries, just let the supplier know. This way a cost-effective medium that suits all parties can be negotiated. This may trigger the supplier company to review their transport arrangements, which can often lead to them discovering better solutions for their business as a whole – a win-win situation. Do not assume that other companies review all parts of their value chain just because your company does.
These are the operations performed by the company. This can be the creation of ideas, the manufacture of goods or the provision of services.
These are the stages of getting a completed product from the factory, to a distribution centre and then to retailers. Value can be added by analysing the cost of storage, the efficiency of storage, the location of storage (e.g. proximity to main transport networks) as well as the transport vehicles and logistics companies used. Many companies will find that a combination of in house logistics and outsourced logistics will work best, depending on the product’s attributes and the location of the retailer.
Marketing is the process of raising awareness of your products and their unique attributes that make them an obvious choice over competition. There are may ways to market a product. Marketing is forever changing and many strategies now focus on social media as well as conventional methods. Please read all our marketing articles for further information.
Servicing the Customer
If there are similar products in the market, one of the ways that a company can add value or differentiate their product is by offering a level of service or warranty that is more attractive to customers than their competition. This could be a free breakdown policy for several years after purchase, a long anticorrosion warranty on vehicles or in some instances a guarantee to replace a product if it breaks or malfunctions within a set time frame (or other defined terms). Some tool companies may offer lifetime warranties subject to certain terms and conditions.
Support activities are self-explanatory but can have an equal impact on value to primary processes. If procurement is not well managed, raw materials may not be available, leading to no end product, wasted marketing and idle logistics. This will cause a company to ultimately lose money. HR needs to ensure that staff are hired correctly and looked after. There are many theories e.g. Herzberg’s Hygiene Theory that demonstrate that looking after staff is an essential part of a company’s successes. Markets are quickly changing. We now have a fast-paced global infrastructure and so technology must be developed accordingly to ensure that a business stays competitive. Depending on the industry, technological advancements will have a greater or lesser impact. Infrastructure is also key. Without a close eye on operations, cashflow can quickly become scarce, even though on paper there are profitable activities that are taking place. Systems, staff and physical premises all form part of infrastructure and need to be analysed as part of a complete (and successful) value chain analysis.
Other Value Chain Models
In other models, a value chain may not be directly to do with physical movement of goods. Instead, a value chain looks at all segments from basic materials through to getting the product or service to the end user. This type of model merges primary and support activities and also introduces the activities that are outsourced or where an external organisation becomes part of the value chain. These chains are often depicted as linear sequences, with each link in sequence being analysed in order to get the maximum output, quality and efficiency (i.e. the maximum possible value).
The company must look at how it can add value to each step. For example, a company manufacturing luxury fashion items will have several steps in the value chain from the procurement of raw materials through to the correct branding that makes the customer purchase. Each step of the value chain will have its own internal and external forces that affect quality, efficiency and volume. Management must appreciate how each step will affect every other step in the process. Each step must be managed so that there is no negative knock on effects to the following stages. For example, if cotton is needed as a raw material, the manager must ensure that suppliers are able to keep up with demand. Not only is production volume an essential factor in this instance, but the quality and consistency of the raw product needs to be ensured. Management will need to analyse producers to ensure that the demands of any extremes in activity can be met. This means that large companies will often use several producers to ensure that demand is met at peak times. Note that it is not always the answer to select many producers to ensure that peaks in demand are met, because it often produces more cost-effective outcomes to select just a few and give them definite minimum volumes that will be ordered. This way, a price can often be negotiated that is more favourable than simply purchasing ad hoc quantities of raw product.
Another part of analysing a value chain can be to address what the company can do directly and which parts should be outsourced. Many managers agree that keeping core activities within your business and outsourcing those which are not core is better, because it allows the company to become the best it can be in the fundamentals that it offers. Often outsourcing means that other parts of the world can be used where there are experienced labourers with an abundance of the necessary materials and equipment. How many readers have a product that adorns an American or European brand that has a label inside that states made in Indonesia, China, India, Pakistan, Mexico or Egypt? Some of these countries may have been selected based on cost, but others may have been selected based on value i.e. an equivalent or even better quality product at a cheaper or equivalent price respectively. Import duties need to be considered, but this is not usually a fundamental part of analysing a value chain, at least not initially.
Value Chain Model
In our opinion there are several relevant models for a value chain. The first (Porter’s) is given in many modern management textbooks and considers primary (functional) and secondary (support) activities. This model was outlined by Michael Porter in his book titled ‘Competitive Advantage: Creating and Sustaining Superior Performance’. This model is often referred to as Porter’s Value Chain. In most references this model is drawn showing the secondary or support activities above the primary activities as in the picture above. However, we feel that it is best that you think of the primary activities first and then shape supporting teams and departments accordingly. This way, this model fits in to other value chain methodologies better. Please see the image below.
As discussed, other models are linear chains. These are simple chains that link each step of the process. For example, a producer of simple plastic kitchen items may have a value chain linkage like:
Chemicals → Plastics → Moulds → Draining Boards → Packaging → Distribution → Marketing → Retailing → Customer
At every step value can be added. Steps will often include input from other companies and raw material wholesalers. These will bring their own elements of value. For example, questions of value could be:
Can the wholesaler keep up with demand?
Are the products of a reliably consistent quality?
Are the products better than competitors?
Does any third party offer something exclusively that helps minimise your competition?
Are the moulds producing constantly uniform products?
Where are the moulds situated i.e. can the end product be entered into a global distribution system efficiently?
Integration of a Value Chain
The company that is being focussed on, or any companies that this company uses, can conduct activities at any part of the value chain. Often companies perform their core activities at multiple parts of the chain, with structured management that ensures that the core activities are integrated into the activity that every other company involved in the process is doing.
For example, a fruit and vegetable company may be the producer of the fruit and be involved in its marketing (after all, they know what makes their produce better than their competitors). The fruit producer is unlikely to be directly responsible for distribution, packaging and retailing. The producer however needs to ensure that timely delivery of product is made to consumers, the produce is recognisable e.g. has unique packaging or small stickers on each item, and that materials from fertilisers through to stickers for brand identity and wax coatings to make their produce shine are immediately available. A distributor of great value is one that can distribute produce widely, in a timely manner and within budget. The better balance of these things that the distributor can achieve, the greater the value to that segment of the Value Chain.
A business can be integrated in several parts of the value chain, or, usually, integrated towards one of the ends e.g. focussing on producing the product or focussing on retailing the product. Examples of each end of a chain may be a functional company that specialises in the manufacture of electronic circuits used by many well-known brands vs. a company that has a high street brand presence that sells in vogue electrical items that adorn their ‘fashionable’ brand.