For your business to grow, you need to provide your customers with value or risk losing business to competitors. Show
How do you know if your product or service is providing customer value? It’s not always easy to identify, especially if you’re operating in a saturated market where customers have a lot of choice. Fortunately, there is a solution to this problem: value chain analysis. Analyzing your value chain will help you identify customer value, gain a competitive advantage and increase your profit margin. In this article, we’ll dive into exactly what a value chain is, how analyzing it can help your business and how to perform a value chain analysis in five steps. What is a value chain?A value chain outlines all the activities it takes to create your final product or service from start to finish. This includes customer research, sourcing materials, production and so on. It provides business leaders and managers with a clear picture of every step in your workflow. As a result, they can clearly identify areas of improvement, including how to gain a competitive advantage and increase profits. The term was coined in 1985 by Michael E. Porter, a Harvard Business School professor. His book Competitive Advantage introduced the basic value chain concept, outlining how businesses can identify primary and supporting activities to create value for their customers. Porter’s value chain argument was that if the value a company offered its customers outweighed the cost of producing it, the result would be a bigger profit. Here’s an example of that calculation: Value Created - Cost of Creating that Value = Profit Margin What is value chain analysis?Value chain analysis is the process of evaluating the activities in your company’s value chain. The goal is to review your processes and practices to find the following information:
There are two different types of value chain analysis: cost advantage and differentiation. Let’s look at these in more detail.
Which of these methods you choose to use depends on what you’re trying to achieve. If you want to boost your income, cost advantage is a good place to start. If you want to become the market leader, competitive differentiation is your best bet. You can also combine the two methods to focus on gaining a competitive advantage while also cutting costs to increase your profits. Regardless of your preferred competitive strategy, the logic behind each method remains the same: the more value a company creates, the more profit it can make. What are the two categories of value chain activities?
A primary activity is anything that directly impacts the input, output or distribution of products or services. These business activities include:
A supporting activity takes the following into account.
Combining the primary and supporting activities gives you a well-rounded approach to value chain analysis. You’ll review every part of your value chain framework (not just the key areas) which helps you accurately review your processes. As a result, you can make informed decisions about how to improve them. How can value chain analysis help your business?Take a look at some of the benefits you’ll have when performing a value chain analysis of your business.
A more effective sales team. Use value chain analysis to review how successful your reps are at attracting and qualifying leads and eventually closing deals. If there’s room for improvement, you can put new measures into place. The more effective each rep on your team is, the better your team will perform as a whole. And if your reps become faster and more effective at moving customer’s through the buying journey, you’ll pocket more revenue. Download your Financial Services Selling GuideLearn how a CRM can help financial service companies adapt and grow in a changing business climate Your data is processed according to our privacy notice. You may unsubscribe at any time. Five steps to perform value chain analysisTake a look at these simple steps to perform a value chain analysis in your business. Step 1: Identify all value chain activitiesIdentify each activity that plays a part in creating your company’s finished product. Start with your primary activities, then move on to your secondary activities. Be sure to cover all the activities in detail. For example, it’s not enough to write down that you have a product design team. You need to dig deeper and ask:
This step will take a considerable amount of time. To speed things up and improve the quality of work, encourage cross-collaboration. That way, each department can outline its logistics, operational costs and services as part of the analysis. A task management app like Asana or Trello will help you organize this process and align people across different teams. Step 2: Calculate the cost of each value chain activityThe next step is to calculate your cost drivers. This means figuring out how much you spend on running the business, which includes payments such as rent, utilities and staff wages. By having an accurate picture of every single cost, you can see how you’re spending your money and how much revenue you’re actually generating. You can also identify which parts of your value chain cost your business the most money. Let’s use a cup of coffee as a value chain analysis example. A value chain analysis on a £2.50 cup of coffee reveals that only 1p goes to the actual coffee grower. The remaining £2.49 is made up of additional supplies, such as:
The most critical component (coffee) is one of the least expensive items in the cost breakdown, with rent and staff being the most expensive. Having this information, the company can make informed decisions about where to invest its money and how to grow the business. Here are a few examples of what the coffee shop owner might choose to do:
Step 3: Look at what your customers perceive as valueYou need to know what your customers want from you. This will help you add the most value to your product or service and allow you to gain a competitive advantage. Without this information, you’re using guesswork to guide your business decisions. As Rory Sutherland’s TED Talk highlights, the same product can mean very different things to different people. He explains that when it comes to selling a product, there’s no such thing as an objective value. Rather, the value that people place on products comes from factors such as societal influence and group-think. You can perform market research to get a deeper understanding of your customers’ psychology, their pain points and their needs. In this situation, market research could include anything from hosting an online survey to running a focus group. Working to understand what your customers want lets you better position your product or service as a solution to their problems. Step 4: Review your competitors’ value chainsMarket analysis is also a great way to determine value as it helps you develop your knowledge of the marketplace and how your competitors are performing. Although it’s unlikely you’ll have access to your competitors’ infrastructure and operational breakdowns, you can use competitive benchmarking as a starting point. This process involves setting a baseline to review the marketing effectiveness of competitors. You can choose to use competitive benchmarking in one of three main ways:
For example, the sales and marketing value chain of online companies can be expansive. By breaking down the rough costs of your competitor’s online sales and marketing efforts, you can calculate whether your spending is too high. McKinsey recommends using a competitor-insight loop to build insight into your competitors’ strategic planning and decision-making processes: Source: https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/getting-into-your-competitors-head The key to making this process successful is to tap into the latest data from a competitor’s frontline workforce, such as a blog or shared database, and identify value gaps. Step 5: Decide on a competitive advantageAt this stage, you’ll have a clear understanding of your internal costs, how they stack up to your competitors’ costs and what your customers value. Now, it’s time to identify which type of competitive advantage you want to pursue: cost advantage or differentiation. If you choose cost advantage, you need to find a way to optimize spending and cut the cost of primary and support activities in your company’s value chain. For example, you might choose to outsource talent, replace certain human activities with workflow automation or look for cheaper delivery services or distribution channels. The more you can push prices down, the larger your cost advantage will be.
You can also use both types of competitive advantage at the same time to maximize impact. To do this, simply perform your value chain analysis with both areas in mind, reviewing ways to cut costs alongside tactics to gain a competitive advantage. It can be tricky trying to find a middle ground within these two areas. If you want to make the process easier, consider using a CRM platform like Pipedrive. Using our software, you can create dashboards and reports that allow you to review all this information at a glance. Apple: a value chain analysis exampleTo see a value chain analysis in action, have a look at this example analysis of the big tech company Apple. Apple’s primary activities1. Inbound logistics Apple’s supply chain is enormous. Its top 200 suppliers account for 98% of the company’s procurement expenditures for materials, manufacturing and product assembly. To manage the sheer volume of suppliers and inbound logistics, Apple must run a tight supply chain management ship. As such, the suppliers are held to strict quality standards. Every year, the list of suppliers is revisited. Suppliers that meet Apple’s standards and provide a more competitive product are added to the list to ensure optimization of its value chain. 2. Operations To keep their operating costs down, Apple takes advantage of lower labor and raw material costs in Japan and China. Outsourcing also helps the company keep overall manufacturing costs low, which allows it to increase its profit margin 3. Outbound logistics Apple's business model allows for products to be purchased online and from the company’s stores. Because the company has hundreds of retail stores, it can capitalize on keeping any retail margins made through Apple sales. Brand name recognition also means that non-Apple outlets stock the products in large numbers. 4. Marketing and sales Apple invests a lot in its marketing and sales efforts. As a company, it’s known for its design, quality and innovation when it comes to promoting the brand and advertising new products The company no longer shares information on its ad spend, but in 2015 its marketing budget rose to $1.8 billion. 5. Service Most products sold by Apple are covered by a 1-year warranty and 90 days of support. Customers can book appointments for technical repairs or general product assistance. The company also staffs its stores with trained Apple technicians who offer customers guided, interactive demos. Store visitors can engage with products and ask the qualified service assistants any questions. As a result, they can see how the products work (which encourages them to buy). Apple’s support activitiesResearch and technology development Apple invests heavily in research and development to maintain its position as a market leader. According to Statista, Apple spent a record $26.25 billion on research and development in its 2022 fiscal year. Human resource management Apple has a reputation for offering staff career development, training opportunities and competitive salaries. In 2021, Apple ranked second in a survey ranking the top 50 most admired companies in HR. The company is also known for recruiting top candidates and even poaching talent from other companies to get the best people working for it. Final thoughtsConducting a value chain analysis is one of the most powerful processes a business can undertake. When done well, you’ll create a product or service that provides the ultimate customer value while minimizing costs. Pipedrive’s sales CRM can help you perform a value chain analysis. With our software, you can easily track your performance and identify areas of improvement in your company’s value chain. Sign up for free to give it a try. What is a value chain example?Value Chain Analysis Example
For example, McDonald's mission is to provide customers with low-priced food items. The analysis helps McDonald's identify areas for improvement and activities that add value to their products and services.
What is a value chain quizlet?Value Chain. the coordinated series of functional activities needed to transform resources into products and services customers want to buy. Consists of primary activities and secondary (or supporting) activities.
Which elements are part of the value chain quizlet?A value chain is a series (chain) of events that includes inbound logistics, warehouse and storage, production, finished product storage, outbound logistics, marketing and sales, and customer service.
Which of the following does the value chain help determine?Value chain analysis is the company's strategy technique to be used in analyzing internal activities within the organization. Its main goal is to determine the activities that are most valuable in the company and which one could be improved more.
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