The current dynamics of the economy and markets have forced many organizations to carry out studies on the differentiating element with respect to the competition. Among these studies is the analysis of the Value chain.
If you want to know more about this important study tool, stay with us so that you know its concept and the elements that make it up. You will also learn to identify the activities that add value to the chain, their uses and benefits.
What is the Value Chain?
The Value chain is a tool that will allow you to know the activities developed by the company that generate competitive advantages. When we are talking about competitive advantagesWe are referring to what makes it more attractive to the market and gives it a superior differentiating effect compared to other organizations.
This internal analysis begins from the moment the company is recognized as a unit where a series of activities are carried out to design, produce, market, sell and support the delivery of a product or the provision of a service.
This study was first introduced by the American professor Michel Porter, in his work entitled: «Competitive Advantage«. Through it, its author has delved into the analysis of organizations that allow you to increase your profitability.
The Value chain It is obtained by examining and dividing separately each of those activities of the entity, in order to know which of them generates value. This is very useful to improve the quality of the product or service provided.
By analyzing each activity separately, you will be able to judge the value that each one of them generates and what contribution it makes to obtaining a competitive and sustainable advantage for the company. The above will provide the strategic elements necessary for the business to be successful.
Elements that make up the Value Chain
The elements that make up the Value chain, are identified through two classes of activities: primary or main activities and support activities.
The primary activities are linked to each other and are related to product design, production, storage, marketing and sale, that is, the following activities:
- Internal logistics– It is made up of the processes associated with receiving, inventory management, and transportation logistics. It should be noted that the company’s relationships with its suppliers represents a determining factor in achieving value creation.
- Operations: in this list we find the machinery and tools, assembly, packaging, equipment maintenance, quality testing. In addition, there are other steps necessary to transform the raw material into a finished product available for sale.
- External logistics: It is related to that of the product or provision of customer service. It also includes the storage or distribution systems that vary from one company to another.
- Marketing and sales: it forms the mechanisms that the organization uses to achieve that the commercialization operation is transformed into a successful sale. The creation of value is obtained through the offer of benefits and the way in which it is generated.
- After sales service: it is related to the maintenance or increase of the value of the products or services after the sale. Within it, there is customer support, claims services, repairs, installations, updates or execution of product warranties.
Regarding the support activities, these complement the primary activities and they help to engage the entire productive apparatus of the company. Trying to do so, achieve the best conditions for the company, guarantee its operability, at a lower price and higher quality. There we find the following steps:
- Infrastructure: they constitute the support systems necessary to guarantee the daily operations of the company. In it we can find administrative and general management, legal support, finance and treasury management, accounting, budget, among others.
- Human resources management: make up all the activities related to the management of human talent. There we find the areas of recruitment and selection, training, social welfare and staff remuneration.
- Technological development or technology: Research and development areas are those found in this category and through them, process automation, technological support, among others, is achieved.
- Purchase: these activities are associated with the processes that are necessary to acquire raw materials, machinery and equipment, buildings, carry out extensions or improvements to the existing infrastructure, contracting services, etc.
As you can see in the previous figure, all these activities generate a margin. However What is margin? It is the value obtained from the products and services directed to the clients minus the costs incurred.
Identification of Activities that Add Value to the Chain
The identification of activities that add value to the ChainIt is of utmost importance for this analysis, since it will allow us to know more about the areas that are productive and others that are generating waste and causing losses for the company.
The foregoing supposes teamwork, where the members of the departments, units or dependencies will make it possible to publicize their processes. An example, the more authorization levels there are in a unit, the greater the probability of finding areas that do not generate value to the business.
In general, the support or administrative areas do not generate added value and those of a primary nature are those that provide the greatest benefit to the company.
On the other hand, we can find that the more extensive the processes, they stop adding value. Consequently, organizations must study their activities well to disincorporate those that do not generate added value to the productive chain.
An example of the above are the tasks that must go through different levels of approval, which generates controls that delay the process and add the so-called “bottleneck“, Which in the long run, produce higher costs and loss of time.
Uses of the Value Chain
The Value chain It is used to identify those activities of the company that are providing added value. In other words, it allows us to know what the competitive advantages of the organization in front of its competition or in the environment where it is developed.
The foregoing implies knowing the strengths and weaknesses of the company’s production process, which will also be accompanied by the identification of the competitive environment where it is immersed:
- Integration level. Those activities that the organization carries out are identified, without the need to use other entities.
- Industrial environment. It describes the relationship of the company with others that are part of the competition or that belong to other sectors.
- Geographic environment. Study the competition within the region or country (s) where the company operates.
- Segment Environment. Analyze the changes that the final product or service provision may face and have effects on the company’s income.
What are the steps you must follow to perform this analysis?
- Identify and describe primary and support activities.
- It recognizes within them which are the ones that generate value, that is, those that produce a differentiating effect and represent advantages for the nature of the business
- Develop new strategies or reinforce existing ones based on the results obtained in the previous step.
In this regard, we recommend that you orient yourself with the activities that we have listed in the previous sections, so that you can identify the ones that best suit the business you are analyzing. Remember, it does not matter if it is a company that produces goods or services or what size it owns.
This kind of study applies to any business and will be very useful to help the organization identify its differentiating element and where it should refine its strategies, so that it can become sustainable and captivate the market where it operates.
So far we have talked about the competitive advantage, we have indicated what it means and if you want to know more we recommend the following link. Now it is up to us to list examples that will allow you to identify it when you perform the analysis of the Value chain:
- The quality of the product is superior.
- Extensive experience in the market.
- High levels of reputation or business prestige.
- Highly qualified staff.
- Possession of invention patent and copyright.
- Long-term contracts.
- Government protection.
- Customer orientation.
- Good relationships with suppliers.
- Customer service is personalized.
- Low costs.
- Excellent work environment.
- high debt and investment capacity
- Lower prices than the competition.
- Little or no competition.
- Job stability for staff and executives
- Unique and inimitable product.
Those companies that incorporate the Value chainRegardless of the activity or sector where they are involved, they will have greater possibilities of obtaining competitive advantages over their competitors. Here are its benefits:
- It allows you to continuously monitor your processes and activities.
- Improves internal processes and optimizes them.
- Reduce costs and improve product quality.
- Aligns the processes and objectives of the company.
- Facilitates the identification of competitive advantages.
- Strengthens the internal control of the company.
- Contributes to the refinement of strategies to achieve greater value in the processes.
- Helps optimize resources.
Use the value chain to achieve competitive advantages!
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