Running a business in the 21st century is not just about fulfilling customer requests. Both manufacturers, as well as end-customer, focused business need to transcend the mere supply chain management and focus on creating integrated value chain networks in order to create competitive advantage.
What is Value Chain?
The term “value chain” was first defined by Michael Porter in his 1985 publication Competitive Advantage: Creating and Sustaining Superior Performance. While supply chain focuses on fulfilling customer requests, value chain refers to the cluster of interconnected activities a business uses to gain a competitive advantage on the market. In other words, value chain seeks to add value to the product (tangible or virtual) through various processes.
With the rise of Industry 4.0 and inclination towards holistic enterprise digitalization, more often than not, value chain also became largely virtualized. In fact, digital advances became one the most efficient tools of value creation.
What are the Key Value Chain Activities?
Naturally, the primary goal of the value chain is to bring maximum value for the lowest possible cost. To achieve that you need to look over and analyze every step of your production necessary to create a product or service and identify ways to increase efficiency. The goal is to establish a connection between what your clients want or value, and your business produces.
Being based on effective interconnectedness and cooperation, the value chain is best leveraged at the company level rather than a department or division level. On a company level, the value chain is composed of five primary activities and four supporting activities.
Primary Activities
Primary activities deal directly with product creation and order fulfillment:
- Inbound Logistics (Receiving, storing, and inventory management)
- Operations (actions that transform inputs into outputs, e.g., turning raw materials into final products)
- Outbound Logistics (physically getting the final product to the customer)
- Marketing and Sales (any activity associated with persuading customers to purchase your product)
- Service Activities (enhancing product value through, for instance, customer support)
Secondary Activities
Secondary activities form the structure thanks to which primary activities are possible.
- Infrastructure (includes activities such as finance, accounting, quality assurance, legal aspects, general management, etc.)
- Technological Development (deals with technical expertise, hardware, software, and any kind equipment needed to transform inputs into outputs)
- Human Resources Management (finding, recruiting, hiring, training the skill and talent necessary for your business)
- Procurement (Getting what you need from third-party sources)
While the spotlight is often focused on the primary value chain activities, neglecting the secondary can significantly, albeit indirectly, hurt your profits as well. Improving efficiency of any of the supporting activities benefits at least one, if not more, primary activities. For instance, impeccable quality assurance has direct positive impact on related service activities.
Competitive Advantages of Value Chain
The above value chain model is a handy analytics tool for identifying your business’ core competencies and activities through which you can pursue a competitive advantage:
- Cost Advantage lies in better understanding your costs and creating the benefit by reducing the costs of individual value chain actions or by reconstructing your entire value chain (e.g., structural changes such as applying new production processes, using new distribution channels, using new sales approach…). The main factors influencing your costs from the point of the value chain are (as defined by Michael Porter):
- Learning
- Capacity use
- Economies of scale (cost saving through increased production)
- Interconnectedness of activities
- Frictionless communication and connection among departments
- Degree of vertical integration (how many stages of supply chain do you control directly)
- Market entry timing
- Company policies regarding costs and differentiation practices
- Geographic location
- Institutional factors (taxes, regulations, etc.)
2. Differentiation value is derived from focusing on your core competencies and outperforming your competitors. You can differentiate by offering faster distribution channels or by offering high-quality supporting services. Again, you can achieve it by adjusting individual value chain activities or reconfiguring your entire value chain. Core activities of differentiation include:
- Internal company policies and decision making
- Timing
- Location
- Interconnectedness of activities
- Interrelationships
- Learning
- Scale (e.g., better services as a result of scale — Amazon offering 1-day delivery because they can afford to operate worldwide)
Beware that many differentiation activities drive up the costs. The key is in finding a balance between the two that inspires the most value.
What Drives Value in Value Chains?
Every smart and profitable value chain is designed to allow for flexibility and effective interconnectedness.
Why?
Firstly, one of the most strategic competitive advantages any business can gain is real-time and accurate decision making and the ability to implement the decisions immediately. And, the most effective decisions depend, inevitably, on the supply of real-time and accurate information.
Secondly, activities fueled by value chain aren’t isolated from each other. Rather, one value chain activity often directly affects cost and efficiency of other ones. The connections exist between both primary as well as supporting value chain activities which makes flawless integration and communication essential to value chain success.
Luckily, thanks to advances information and communication technologies timeliness and accuracy are ceasing to be problematic. With the growth of smart technology implementation in all stages of the value chain, businesses can capture increasingly accurate data as well as apply them — thanks to digital agility — without high costs or disruption of the system.
How Can You Create a Flexible and Integrated Value Chain?
It’s no surprise, smart information and communication technology plays a central role in the flexible and integrated value chain. Well-integrated use of smart hardware and software can help you:
- speed up completion of tasks
- accelerate data collection and analytics
- improve speed of reaction to market developments
- lower costs of information processing
- improve decision-making
- enhance efficiency of factory operations
- reduce errors, improve quality
- reduce delivery periods
- improve inventory management, and so forth.
However, not every business can afford developing unique technologies to improve processes. Bespoke digitalization can be costly and often not flexible enough to serve the fast-changing market.
Is Outsourcing the Answer?
To take the full advantage of the digital, you don’t have to do everything by yourself. You can specialize in some of the value chain activities while outsourcing the rest. To decide which action should be outsourced, you need to understand the strengths and weaknesses of your business regarding cost as well as capacity to differentiate.
Consider the following:
- Can the activity in question be performed better and cheaper by a third-party provider?
- Is the activity in question a core cost or differentiation driver?
- What is the risk of keeping this activity in-house? For example, if the activity relies on fast-changing technology or market, it might be better to outsource so as to maintain flexibility and avoid spending enormous amounts of money on specialized assets that can be soon outdated.
- Consider if the outsourcing of a given activity can lead to improvement of business processes such as better flexibility, shorter lead time, reduced inventory, etc.
An excellent example of driving value chain through outsourcing a set of activities is payever OS. Imagine a manufacturer breaking into the end-consumer market or simply wanting to revamp the supply chain and improve communication to add value their smart factory operational processes.
payever OS allows the manufacturer to connect, under a single dashboard, existing systems with payever applications and so, manage all processes under one roof. For instance:
- The Product App helps to keep close track of the inventory, alerting the manufacturer to what products are trending and allowing to adjust the production accordingly.
- The Shipping App keeps track of all merchandise from the moment it leaves to factory until it reaches the end-consumer or retailer. Both the manufacturer and consumers derive value from visibility. Customers can track their order, reducing waiting time or return-hassle-related anxiety, while the manufacturer can identify errors and delays in real-time and make necessary changes before any major collateral damage is done.
- The Communication App lets the manufacturer put all communication channels (chat, email, texts, etc.) under one roof speeding up customer service response time as well as accuracy.
- The Payment App enables the manufacturer to activate and deactivate multiple payment methods with just a click answering the needs of the market with agility.
The list goes on, the Statistics App collects and analyzes data in real time, the Marketing App helps you optimize digital marketing campaigns, etc. Nonetheless, the critical advantage lies in interconnectedness and integration of the software that enables smooth communication and visibility across all departments and activities.
Creating a similar system could take a lot of money and months to develop as well as maintain while using a third-party provider takes away the burden of maintenance and update that would otherwise have to come out of your pocket.
Conclusion
In order to succeed in today’s market, you need to look way beyond efficient supply chain and find new creative ways of deriving value which hides in the unexplored hoops and loops of your business activities.
Whatever system or process you decide to apply, you should always keep flexibility and integration at the highest standard. Why? Well, digitalization is not just about changing once, it’s about being able to change and evolve continually.
