A business is made up of many moving parts, and being able to identify and understand how each activity adds, or subtracts, value to the final product or service can be challenging.
This is where value chain analysis can prove highly effective, empowering companies to take a granular look at their operation and work out where improvements can be made and what extra value this can add, as well as how each activity impacts another.
What is the value chain, and why is it important?
The value chain comprises every activity involved in getting a product or service from supplier to customer. Understanding it through value chain analysis enables a business to identify where and how it adds value, and how to optimise this.
There is a distinct difference between the value chain and the supply chain: the supply chain centres on the logistics of supplying raw materials and services to help make a product; the value chain meanwhile includes the supply chain and all other production and operational activities involved up to the point of sale.
To identify different elements of the value chain more easily, the popular Porter's Value Chain Model [1] breaks it down into two groups of 'primary activities' and 'supporting activities.'
Robin Waite, a business coach, says that for businesses to thrive they need to continually optimise their value chain activities. “Established businesses are often ones that look for ways to continually enhance the value they deliver [for] both customers and to the organisation," he says.
"This goes beyond improving products and services. Analysing each primary and support activity can help to increase profits.”
How to perform a value chain analysis
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Below is a step-by-step guide to performing a value chain analysis:
Step 1: Define and identify each value chain activity
Companies need to identify their primary and support activities. Primary activities directly add value, like procuring wine in hospitality businesses. Support activities indirectly contribute, such as hiring and retaining bartenders.
As Waite says, canvassing a diverse group of employees can be extremely worthwhile at this stage: “Asking people from different departments and skill levels – from shop or factory floor to board level – to share their input on which processes they believe add value can offer great insight into where it really lies and, ultimately, the best way to maximise that value.”
Step 2: Analyse the value and cost of each activity
By analysing how each activity adds value to both the customer and the business, and then looking at what each activity costs to complete, organisations can highlight how cost-effective each stage is, as well as identify how to maximise efficiency.
Step 3: Identify links between different activities
By working out how activities are connected, businesses can use the value chain to increase competitive advantage.
For example, ECAM Engineering, a precision engineering company, fabricates steel parts for sectors ranging from rail and automotive to medical. Having the right software package to manage each order, a supporting activity, from basic materials to finished parts is key to providing a quality and timely service, a primary activity. New parts orders are entered electronically each week, and the software produces a report detailing which raw materials are needed. This order is automated, using a portfolio of approved suppliers.
“Each job is standardised, from the moment we press ‘go’,” says ECAM managing director Phil Arme. “A job sheet is produced showing materials, processes, quantities and dates, and this follows production through the system until the part is complete.”
Step 4: Identify opportunities to increase value
By identifying what changes can be made to certain stages to increase the value added, companies can work out cost and payback, and validate actions.
For example, when Arme bought ECAM 10 years ago, his mission was to modernise the company. He set out to automate manual processes, increase operational efficiency, a key part of any business’ financial analysis, and grow the company overall.
One opportunity identified for improvement was automating the welding process due to a shortage of good, reliable welders. ECAM worked with Make UK, which represents UK manufacturers, who advised the company on buying a robotic welder.
“As an industry average, one robotic welder does the work of three manual welders,” says Arme. “It means that straight away we’ve got a return on investment, and the robot is reliable and carries out a consistent quality of work.” The machine has also given ECAM spare capacity, which will allow it to take on new customers.
Healthy cash flow can improve a business’s ability to invest in new technology, enabling it to capitalise on opportunities highlighted by value chain analysis. The American Express® Business Platinum Card comes with payment terms of up to 54 days, which may put more flexibility in a business's cash flow management¹. Moreover, Amex® Business Platinum Cardmembers get up to £150 in statement credits annually that can be used for UK purchases with Dell, helping to invest in new tech to drive efficiencies².
Using value chain analysis to help your business
By applying value chain analysis, businesses can identify which activities add the most value (and how) and which areas can be improved. It also provides a plan for how to make and prioritise improvements and understand which changes will add the most value and provide the biggest return.
Having this granular information to hand empowers organisations to amend or eliminate inefficient business activities to gain or strengthen competitive advantage, increase productivity and boost profit.
“We have management meetings where we highlight areas that have become bottlenecks or which present quality issues, or because they are easy to identify and fix – for example, if we've got an old machine that is prone to breaking down," says Arme.
"We'll go and look at new machinery, visit shows and find out what's best for us. We need to work out if there's a good payback and over what time frame; we'll make the changes that are going to have the most impact on the business.”
SWOT analysis vs value chain analysis
Value chain analysis and SWOT analysis are both strategic management tools, but they have different purposes.
Where value chain analysis is used to understand a company's operations through segmentation, SWOT is often used in the early stages of strategic planning to identify key strengths, weaknesses, opportunities and threats. Waite says SWOT is valuable when there is a fundamental shift in a business’ direction. “If you’ve got a new product that you want to take to market, or you’re looking to take an existing product to a new market, that’s when SWOT can be useful,” he says.
1. 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.
2. 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 Value Chain and Competitive Advantage. Understanding Business: Processes, 2001
