No successful business rests on its laurels. Market entrants, competitor activity and changing sector trends pose a continual threat. This means organisations must continually examine the way they operate, looking at each strategically relevant business activity in isolation and identifying ways to add value.
Key to running an optimal operation is the value chain. The value chain comprises every activity involved in getting a product or service from supplier to customer, from procuring raw materials or resources to producing the final commodity. This spans sourcing and procurement through to conversion, assembly, logistics, marketing and distribution.
Understanding each step in this chain allows business owners to identify opportunities to streamline processes, reduce costs, and ultimately create more value.
“The more value an organisation can create, the more profitable it is likely to be,' says William Millen, Chief Executive at Unicorn Solutions UK, which specialises in advising small businesses on import-export strategies and supply chain efficiencies.
"By providing more value to customers, businesses can build competitive advantage.”
Understanding value chains
Businesses should start by visualising the entire journey of their product or service, from raw materials to the product or service received by the end customer. There will be multiple steps involved, and each step is likely to rely on external partners and resources.
Value chain vs supply chain
Both the supply chain and the value chain start with production and end with the customer, but there is a distinct difference.
A supply chain encompasses the companies and individuals involved in providing a business with the raw materials, parts and resources needed to create a product for sale. The value chain, meanwhile, includes all the elements of the supply chain, but also looks at how value can be added at different points on the journey to a sale - for example through product development and marketing.
According to Michael Porter’s 1985 book Competitive Advantage: Creating and Sustaining Superior Performance [1], the value chain is the process of adding value to raw materials through a series of business activities, ultimately creating a product that satisfies a customer request.
Porter’s value chain model
Porter’s Value Chain model analyses the supply chain to identify an organisation’s competitive advantage. The model can be used as a tool to increase the value of a business at every stage, helping it to maximise profit by minimising cost.
The model breaks the value chain down into primary and supporting activities. It highlights five primary activities that generate value directly and four that support the successful execution of primary activities.
Primary activities
- Inbound logistics: procuring raw materials, supplies and any resources integral to production.
- Operations: raw materials are converted into a finished product or service – converting inputs into outputs.
- Outbound logistics: the storage, packaging, transport and delivery of the final products to the customer.
- Marketing and sales: relies on activities ranging from market research and advertising to pricing strategies, management of the sales force, and customer relationship management.
- Service: all activities relating to customer support, from after-sales support to product warranties, repairs, returns and customer complaints.
Support activities
- Business infrastructure: encompassing finance, legal and administration, a robust infrastructure is critical to a business’s day-to-day operations.
- Human resources development: recruitment, training, motivation, reward and retention of employees.
- Technological development: research and development, innovation, and ensuring that the technological infrastructure supports value creation.
- Procurement: from finding suppliers to negotiating prices, activities range from contract management to maintaining the availability of raw materials, components or resources.
One way of extracting more value from the procurement process is to improve cash flow. Paying suppliers with an American Express® Business Platinum Card can help cash stay in your business bank account for longer, with payment terms of up to 54 calendar days¹.
And if you need to strengthen your value chain by investing in new technology, American Express Business Platinum Cardmembers receive an annual £150 Dell Technologies credit, which can be used towards equipment purchases².
Value chain examples
Prevented Ocean Plastic, part of the distribution company Bantam Materials UK, supplies brands with traceable recycled plastic. Its supply chain starts with an individual, or first collector, collecting plastic from an at-risk coastline, such as Bali. This is taken to a collection centre where plastic is sorted and then delivered to a recycling facility, which turns it into plastic flakes or pellets.
This recycled plastic is then bought by Bantam Materials and sent to a European manufacturer.
Examples of the value chain at work in this process include Prevented Ocean Plastic’s responsible sourcing and traceability of plastic. This falls within ‘inbound logistics’ under Porter's model.
As Raffi Schieir, Founder, of Prevented Ocean Plastic says, these operational stages present opportunities. “The huge gap in our industry was around collection and sortation," he says.
"We realised that by getting involved at this level, we could increase the yields of our materials.”
Prevented Ocean Plastic achieves over 20% more yield than the industry average by engaging at the collection and sortation level, creating 20% more income, as well as improving traceability and control. “That drives the monetary value that we can put through the supply chain,” says Schieir.
Adding value at the grassroots level has also transformed Bantam Materials from a distribution business to a grassroots supply chain function, giving it a strategic advantage over competitors and increasing its power as a business.
Why does the value chain matter to your business?
Being able to identify the value chain affords businesses numerous advantages, chiefly positioning them to gain an edge over competitors by maximising productivity and minimising costs. As Millen says, “The value chain enables businesses to map all of their key activities, and to look at each one to see where they can improve efficiency and focus, and therefore their margin.”
It also offers clarity around how the business works, and how each activity relates to the other. “Using Porter’s model as a starting point alongside your business plan helps you to take a step back and make strong strategic decisions,” says Millen.
Value chain analysis
Value chain analysis is a strategic process that sees companies evaluate each detailed procedure within the operation to increase profit margin. Examining each step in this way can enable companies to identify operational deficiencies, reduce costs and differentiate the product or service.
How ESG is impacting value chains
Environmental, social and governance (ESG) challenges and initiatives are now more relevant, so businesses need to consider these when building value chains.
ESG in the value chain encompasses:
Environmental (sustainability, climate change risks, supply chain transparency)
Potential environmental risks from suppliers include carbon emissions, pollution violations or unsustainable resource extraction.
Social (treatment of workers, diversity and inclusion, community impact)
This area is concerned with an organisation’s relationship with the communities it serves, from how it handles workers’ rights to how it contributes to local communities.
Governance (ethical sourcing, risk management, transparency and accountability)
This relates broadly to transparency and encompasses a business’ decision-making, reporting, values and culture.
While Prevented Ocean Plastic's environmental credentials are clear, Schieir is equally proud of the steps the company has taken to address the social and governance elements in its value chain.
For example, the company’s collection centres operate under joint ownership. “We are the minority shareholders so that we can control the programme and ensure responsible sourcing, but the majority shareholders are the locals," he says.
“We know that if we set up a fit-for-purpose collection centre and locals have fair decent wages and are treated well they will choose to engage with us; to do that we have gone back to that first step in the supply chain.”
Each company’s value chain will be unique, but one truth is universally applicable: understanding each business activity, and how these activities interconnect, is integral to maintaining competitiveness and maximising value, and, ultimately, profit.
- The maximum payment period on purchases is 54 calendar days and is obtained only if you spend on the first day of the new statement period and repay the balance in full on the due date. If you'd prefer a Card with no annual fee, rewards or other features, an alternative option is available – the Business Basic Card.
- Once you have enrolled your Card Account, you’ll get up to £75 in statement credits between January and June, and the same between July and December for United Kingdom purchases with Dell Technologies on your Business Platinum Card – up to £150 in statement credits annually. Terms and conditions apply.
Sources:
[1] Porter, M. E. The Competitive Advantage: Creating and Sustaining Superior Performance. NY: Free Press, 1985