- February 22, 2021
Value Chain Analysis Modeling
One of the most important tasks for businesses is to work together to satisfy customers’ demand for goods and services. Therefore, you need a value chain to transform your ideas into a valuable product for the market. When a value chain is well planned, you can increase the value and lower the cost of a product.
If you are interested in knowing how to increase your business’ efficiency, you have to familiarize yourself with this concept. In this piece, we will cover 2 different value chain models, what do value chain activities include, what is a value chain analysis, and how to do a value chain analysis.
Michael Porter’s Value Chain Model
Before talking about value chain analysis, we have to learn about Michael Porter’s value chain strategy. The use of a value chain is to analyze the flow of activities from raw materials to the customers and to look for ways to add value to it. According to Porter, you can have a more competitive advantage when more value is provided to your customers.
Porter’s value chain helps to maximize a company’s profit margin by managing value chain activities, in which each activity can be changed to reduce cost and to improve the value. There are two types of activities, namely primary value chain activities and support value chain activities.
Primary Value Chain Activities
There are 5 primary value chain activities within Porter’s value chain strategy. They are the operational and physical activities of the production of goods.
- Inbound logistics
This is the transportation and receiving of raw materials from suppliers. This activity also involves managing and sourcing materials. The relationship and transportation contract between retailer and supplier is the key to creating value.
This process includes activities of changing raw materials and inputs into finished products.
- Outbound Logistics
It is the step of delivering and distributing the finished products to your customers. This encompasses order processing, packaging products, as well as shipping orders.
- Marketing and sales
These processes are how you provide customers with information about the features of your products and the way you persuade your target customers to spend on your company. These involve making decisions about distribution channels, pricing, promotions, etc.
After-sales services are the activities of maintaining the value of your products. Customer service, installation training, maintenance, refund, and exchange.
Support Value Chain Activities
Support activities are managing activities within the value chain model. They aim at assisting the primary value chain activities.
- Firm Infrastructure
This is a company’s organizational structure and daily operations for all the value chain activities, both primary and support. The infrastructure consists of management, planning, finance, and quality control, to name a few.
- Human resources management
The HR department in charge of recruiting, training, motivating, rewarding, and retaining the company’s employees. Since workers are one of the most important resources, HR practices should be done effectively.
- Technology development
This is the process of managing technical information and innovating technology. The company will minimize the cost needed for research and development, maintain technical excellence, and keep an eye on new technology.
Procurement is the stage of purchasing that supports all the operations and primary activities. For instance, buying inputs and delivery vans for inbound and outbound logistics, respectively. The purchase of marketing materials for the sales department is also part of this step. Procurement determines the total cost being used, and greatly affect the profit margin.
What is a Value Chain Analysis?
Value chain analysis is the process of examining all the business activities that we have covered above and see how they help to build competitive advantages.
How to do a value chain analysis?
There are 3 main steps for conducting a value chain analysis. In the following, we will use a fashion retailer as an example to explain the whole process.
- Analyze activities
Retailers have to determine what the core activities that cater to the market demand are. Whether they are the client-facing activities or the non-client facing activities.
- Analyze the value and cost
In this step, you are going to examine the value of each activity and how they add value to your customers. The value factors for each activity will be listed in this stage, with the most valuable reason ranks first. For instance, if customer service is your primary activity, in which the value factors are that you send personalized messages to customers, reply to customers within a short period, and provide comprehensive customer support.
- Understand what your consumers value the most
Businesses have to learn about their target consumers’ behavior and what they consider as valuable. You can research surveys, questionnaires, or actively ask for feedback after they purchase to see what they expect. Many of you may wonder how to attract customers to fill in surveys since people tend to skip them. In this case, rewards such as a 5% off discount, coupons, or lucky draw could be provided. Based on the above example, you can raise questions about their satisfaction with the response time of your company.
- Evaluate and execute your plan
Retailers have to decide which activity needs to be changed to increase its efficiency, add value, and ultimately raise the margin. Again, regarding customer service, you may want to make specific changes to address your goal of maintaining customer loyalty as well as the result of the conducted surveys. Several improvements can be made, such as a set of words being used in personalized messages that align with the brand’s image, reply to consumers within 1 working day, and provide employees training and briefing whenever there is a modification to consumer terms and conditions.
VRIO Framework – Internal Value Chain Analysis
Similar to Porter’s value chain strategy, the VRIO framework is used for evaluating the resources of a firm and competencies. The creator of this value chain model – Jay Barney defined resources as the assets, capabilities, organizational processes, firm attributes, information, and knowledge of a company. The VRIO framework also goes with strategic analysis, like Porter’s five forces analysis and SWOT analysis.
The word VRIO is an acronym that stands for value, rarity, imitability, and organization. Businesses have to look into each resource within the internal value chain and see if they are valuable, rare, inimitable, and organized. By doing this, all the strengths we have can be examined, and which asset brought the most competitive advantage. We can see which resources can be the core capability while which ones are less important.
There are 4 main criteria or questions to ask yourself when working on VRIO analysis. These 4 questions are preferred to be asked in the following sequence.
- Value: Does your resource enable the firm to carry out a strategy to make the most of opportunities and nullify threats? Does it help to increase revenue and reduce cost? Or does it bring value to customers?
- Rare: Is your resource unique, that it is not commonly possessed by or could be replaced by your competitors or companies within the industry?
For example, when everyone within the market is having the same machinery for production, no one can gain a competitive advantage over the others.
- Inimitable: Can your resource be substituted by others? Could other businesses obtain or duplicate it easily?
To meet this criterion, your resource should be costly to imitate by other people.
- Organize: Do you have well-organized management systems and structures, that allow you to have the ability to leverage the resource.
You will need a strategic management plan to fully utilize your valuable, rare, and inimitable resources.
How to analyze your resources using VRIO analysis?
After looking into each resource, you will classify them into five main categories, they are competitive disadvantage, competitive parity, temporary competitive advantage, unused competitive advantage, and long-term competitive advantage.
Here is a table showing how resources should be categorized.
As we can see, resources with all the attributes can help to build sustainable competitive advantages. However, it is not possible to have all your resources fulfilling the VRIO qualities. For example, you have a rare software program that helps the company to save time effectively, but it is not an inimitable resource that could be substituted by your competitors. To make it inimitable or with even more attributes, you would like to use copyright to protect the computer software. As a result, no one can imitate your work without your consent. Your resource will go to the next stage and provide an unused competitive advantage.
This piece has covered the VRIO internal value chain analysis and Michael Porter’s value chain model. They are both very useful tools for analyzing the activities of your business. Value chain analysis also enables you to focus on your core competencies to add value to your customers as well as to gain competitive advantages. We are hoping that we have given you insights on what is a value chain analysis and how to do a value chain analysis. Get started and make a comprehensive overview of your business!