Advanced Explanation of Value Chain Analysis
- Overview of Value Chain Business Concept
- Deep Dive of Value Chain Business Concept
- Primary Activities
- Support Activities of the Value Chain
- Conclusion: How to Derive the Profit Margin using Value Chain Analysis
Overview of Value Chain Business Concept
The value chain analysis is a business concept that describes all activities essential to deliver products or services from start to end. This concept embraces steps from raw material sourcing, production to distribution, including sales and after-sales activities. The value chain concept also describes various supporting activities that essential throughout these activities, such as strategic planning, quality management, finance, recruitment, technology, and procurement.
Deep Dive of Value Chain Business Concept
Value chain analysis is a value-based internal assessment to obtain a competitive advantage. The goal is to determine the internal links of the activities in the company and improve efficiency in each activity. Customer satisfaction retains based on the value of the products or services. Successful companies produce products or services which have greater value for their customers than what it cost for production.
1. Inbound Logistics
Inbound logistics is an activity where resources are gained. For a production-oriented company, inbound logistics are the raw materials. This activity includes receiving, storing, and distribution of the raw materials throughout the production lifecycle.
Examples: track raw material input, storage, control inventory, transport schedules, and return damaged goods to suppliers.
This is the activity where raw materials components get transformed into new products. The final product is created in this activity. Various streams of value are added to the product at this stage as it moves through the production line.
Examples: production belts, production process, packaging, machinery maintenance, quality assurance, defects testing, printing, and all operations of the factory.
3. Outbound Logistics
Outbound logistics activity is the delivery process of the finished product to their customer. For a manufacturing company, their immediate customer would be the wholesaler. The end customer may receive the product through the distribution channels of wholesalers and retailers. Distribution of the finished good from the company to their immediate customer is treated as the outbound logistics.
Examples: finished goods distribution, vehicle schedule handling, delivery order handling, sales order processing, and process the sales returns.
4. Marketing and Sales
Every product has a target market of potential consumers. This activity is how well the company presented and sold the product to the potential target market. Duty of the sales professionals in the company to make sure the product awareness is there on the target audience. A mix of marketing strategies can be used to fulfill this activity.
Examples: brand building, marketing, promotion, salesforce, tenders, quotations, target market selection, customer relationships, and product pricing.
After-sales support is crucial for the long term survival of the business. Comments from the unsatisfied customers can easily damage the reputation of the product. The company should focus on the right processes to take care of the customer inquiries which raise after the sale. Solid after-sales services are essential to enhance or maintain the value of the product after it has been sold and delivered.
Examples: repair, periodic scheduled maintenance services, warranty, guarantee, training, and after-sale services.
Support Activities of the Value Chain
Procurement refers to the entire purchasing related process of the company. This is not only the purchasing inputs or not only related to the raw materials. Procurement activity covers raw materials, equipment for technology development, equipment related to periodic maintenance, administrative consumables, fixed assets such as machinery and buildings. The objective of this activity is to find quality supplies that meet the criteria of procurement.
Examples: Tendering processes, advertising, procurement criteria definition, offer the contract/purchase order, and budget management.
2. Technology Development
This activity is related to the capacity of innovation in the company. Technology helps to streamline the entire value chain. This will lead to an increase in the efficiency in activities, which leads to a competitive advantage. These activities related to the effort that the company is making to improve the products and the processes.
Examples: enterprise resource planning (ERP) solutions, product research for enhancements, research for new products, and improving the technology used in existing activities/processes.
3. Human Resource Management
The company cannot survive in the market without having talented, skilled employees in the organization structure. This activity is related to recruiting, training, and developing the right people to the right job role. Staff satisfaction should be measured in a periodical manner to reduce turnover. Also, staff should be motivated based on fringe benefits and other facilities. The company finds and retains the highest level of talent at the firm. Technological and consulting companies depend heavily on their talented employees.
Examples: recruitment, on-boarding, development, training, retention programs, and off-boarding.
4. Firm Infrastructure
Firm infrastructure relates to the organizational structure, internal control systems, and the culture of the company. This also related to activities such as accounting, finance, legal, control, audit, quality management, and general (strategic) management. This is the place where business decisions made. The effectiveness of these decisions is based on the capacity of the activities of firm infrastructure. These are the most powerful source of competitive advantage for the company.
Examples: strategic management, finance, legal, customer relationship, public relations, and quality control.
Conclusion: How to Derive the Profit Margin using Value Chain Analysis
The firm’s margin or profit depends on its “effectiveness” in performing above primary and support activities efficiently. The difference between the “amount” that the customer willing to pay for the products and the cost of the activities in the value chain is the profit margin of the company. Hence, the profit margin can be increased by the following ways,
1. Reduce the cost of the activities (streamline the primary and support activities)
2. Increase the value of the product through technology development
It would be easy for a company to eventually achieve economies of scale by optimizing the entire value chain.
Check below article for the difference between value chain and supply chain,