Every executive in the world spends part of their day wondering how to make their products and services stand out while still turning a profit. That’s the dream of all businesses: create great products and earn a lot of revenue.
Though it’s easy to articulate, it’s not easy to accomplish. So what’s the secret ingredient—the difference between the companies that rise to the top and those that crash and burn? Companies succeed or fail for various reasons, but one of the most powerful reasons is their competitive edge.
Value chain is a model that helps companies determine their competitive edge and then refine their business practices so they’re operating with maximum efficiency and the largest possible profit margins.
If you’re wondering how all that gets accomplished, keep reading. In this piece, we cover:
What is a value chain?
Value chain is a business model used to examine all company activities involved in taking a product or service from idea to sellable item. Ideally, companies can use the value chain model to strengthen their point of view and widen their profit margin—more efficiency, fewer costs.
Generally speaking, there are two ways to improve the “value” in your value chain:
- Increase the social value of your company and products via product quality and brand credibility so consumers will purchase more.
- Decrease the cost of your product and the cost of production for that product so profit margins are wider and customers will purchase more.
By either improving value or decreasing costs based on your company’s value chain, you create a competitive advantage in the market and hone your sales strategies.
Components of Porter’s value chain
The industry’s current understanding and model of the value chain comes from Michael Porter’s 1985 book, Competitive Advantage. Considering how quickly trends move in sales, the fact that we still use this model speaks to how well it works and how much it’s benefitted companies over the years. Porter breaks value chain analysis (VCA) into five primary activities and four secondary activities that together create value greater than the cost of performing those activities individually.
That premise makes sense: profit is created when the overall cost of producing your product is less than the amount you sell that product for. However, many companies fail to diligently track every aspect of product creation and therefore miss opportunities to increase profit margins.
The VCA chart is broken into two sections: primary activities and secondary (or support) activities. Primary activities focus on the manufacturing of goods and services while secondary activities back up primary activities.
Primary activities include:
- Inbound logistics: Availability of raw materials, warehousing, and distribution (essentially anything in your supply chain)
- Operations: Creating products from raw materials
- Outbound logistics: Delivery of products to customers, including warehouse, transportation, and distribution
- Marketing and sales: All advertising and sales interactions and activities
- Service: All forms of customer support interaction and brand credibility
Secondary activities include:
- Infrastructure: Any administrative, finance, management, planning, or legal operations needed to support primary activities
- Technology development: Any technological improvements made to existing machinery, hardware, or software in the name of supporting primary activities
- Human resource management: Hiring and placing workers
- Procurement: All purchases related to buying raw materials or any fixed assets (for example, vendor fees and selection)
The key to a successful value chain analysis is figuring out which processes could be run more efficiently and implementing fixes in a timely fashion.
Benefits of value chains
The value chain framework enables your company to understand and analyze where cost efficiency is good or poor within the organization. When you look at your company’s value chain analytically, you can:
- Back up decisions regarding different business activities
- Pinpoint areas of ineffectiveness and correct them
- Understand the links and responsibilities between different aspects of your business
- Optimize efficiency while lowering expenses
- Create a cost advantage over competitors
- Understand exactly where your business is succeeding
It might seem like a lot of work to review every single company activity to determine competitive advantage, but that insight makes a difference. Just as KPIs and reporting inform your sales decisions, a comprehensive value chain analysis informs decisions across your entire business.
How to create a value chain model
Building a value chain model for your company is a repeated, four-step process.
- Identify the sub-activities of each of your primary activities
- Identify the sub-activities of each of your secondary activities
- Find links between all activities
- Discover opportunities to increase value or decrease costs
Like sales, your value chain is a cycle that you can evaluate at different points to make sure you’re achieving maximum velocity. Each step has meaning and opportunities for improvement. If you have sales on the brain, think of the value chain as your business pipeline.
Step 1: Identify the sub-activities of each of your primary activities
According to Porter, there are three types of sub-activities possible for each of the five primary activities:
- Direct activities
- Indirect activities
- Quality assurance
Direct activities are activities that create value on their own. For example, look at the primary activity of inbound logistics. A direct activity might be reaching out to suppliers for new raw materials.
Indirect activities support direct activities and allow them to run smoothly. Looking again at the direct activity—reaching out to suppliers for new raw materials—the indirect activity to support it might be keeping an updated log of supplier contact information.
Finally, quality assurance activities ensure that both direct and indirect activities remain up to a certain quality standard. If we’re considering reaching out to secure suppliers and logging their contact information, a quality assurance activity might be researching the suppliers in consideration and making sure their company values align with yours. For example, if you’re marketing yourself as an eco-friendly company, you need to make sure you’re sourcing your materials from other eco-friendly companies.
Step 2: Identify the sub-activities of each of your secondary activities
Step 2 largely follows the parameters of step 1. However, when you’re reviewing your secondary activities, you want to try and find sub-activities that also complement the primary activities. Remember: The purpose of your secondary activities is to support the primary activities, so when you’re looking for sub-activities, they should do the same thing.
Step 3: Find links between all activities
Company activities rarely occur in a vacuum. Most, if not all, of the actions your company takes impact other aspects of your business. The trick is to identify those links so that you can learn to take advantage of them.
Let’s go back to looking at securing a new supplier in inbound logistics for raw materials for an upcoming product. There are a fair number of factors that affect choosing a supplier: Have you worked with them before? What are they charging? How far away are they? Will transit costs outweigh product costs? How fast can they get your company the raw materials?
The answers to all those questions affect other aspects of the company outside of inbound logistics. For example, choosing a supplier with a longer shipping or transit distance impacts the rate of production, which impacts the price of the product. That, in turn, impacts the target audience, which impacts overall sales.
Similarly, if you’re working with an overall company budget and you choose to invest in higher-quality supplies, that means the money has to come out of the budget for another activity. Sometimes the math works out fine, but you need to know which parts of your company are producing the most value in order to make an informed decision about where the money should come from. It makes no sense to short-staff your sales team when you’ll need them to push a more expensive product.
Step 4: Discover opportunities to increase value or decrease costs
Once you’ve established a comprehensive list of links and activities, see if you can find opportunities to increase value (for the customer) or decrease costs for the company. You never want to completely sacrifice cost or quality, but there’s frequently a middle ground that helps companies regain footing.
This is also the time to look for pockets of activity that aren’t adding significant value, such as outdated software that you’re still paying for or old advertising you forgot to cancel. You can also evaluate relationships and see which ones still benefit you. Not all business relationships are made to last, so use your development team to cut ties with any loose threads.
Value chain example
Let’s look at an abridged value chain example for Apple, Inc. We’ll get to analysis in a moment, but for now, let’s focus on the facts of the primary activities:
Apple works with an astounding 200+ suppliers who are reviewed annually for optimization. These suppliers handle approximately 98 percent of procurement for materials, manufacturing, and product assembly.
Apple products are manufactured in Japan and China through outsourcing. That keeps labor, material, and overall processing costs relatively low.
Apple products can be purchased online, in an Apple store, or via a distributor (for example, Best Buy). Distributors receive a 25 percent wholesale discount in exchange for stocking Apple products in a prime placement.
Sales and marketing
Apple focuses sales and marketing almost exclusively on design and brand credibility. Its qualified leads include anyone with the money to purchase an Apple product.
Apple emphasizes customer service: long warranties, the Genius Bar, and trained in-store technicians. The company emphasizes customer service so that the buyer journey continues every time they release a new product.
Value chain analysis
Now that we know Apple’s primary activities, let’s delve into a bit of value chain analysis. Value chain analysis is the process of taking your value chain and evaluating what it means for your company moving forward and what decisions you should make.
The first step in any analysis is to decide what you want to achieve. We’ve established that the two ways to increase value/profit are to increase quality for the customer or to decrease costs for the company and customers. It’s not usually feasible to do both right off the bat, so it’s generally better to pick an angle that works best for your company.
Given Apple’s emphasis on customer experience and brand credibility, we can assume that it tries to maintain a competitive edge by providing exemplary products and experiences, not by lowering costs. That is not to say cost isn’t a factor in its business—after all, it outsources operations for a reason. It’s merely to say that in terms of market value, people are drawn to Apple for the brand, not the price (in contrast to a low-cost, high-production company like McDonald’s).
Because we are looking at a quality-advantage company, not a cost-advantage company, we then want to perform what’s called a differentiation advantage analysis (for a business like McDonald’s, we’d want to run a cost advantage analysis).
Differentiation advantage analysis
There are three steps to differentiation advantage analysis:
- Identify value-creating activities. Once you’ve listed all activities, pull the ones that contribute most to customer value. These could include marketing and branding, extra feature production and tech, etc. One of the top-valued activities for Apple is the tech-trained employees, so let’s move forward with that one.
- Look at strategies for improving those activities to increase customer value. If your product value is coming from brand credibility and certain services, find ways to increase those activities. Apple’s trained employees are currently available in Apple stores only. What if the company looked at having an Apple employee partner with a distributor so that same service was available wherever Apple products were sold?
- Identify a sustainable differentiation. Not all possible customer-value improvements are sustainable. Look for activity improvements that will keep generating profit over time. Of course, Apple products are sold at hundreds of thousands of locations, so a tech at every one might not be feasible. Perhaps finding the distributors farthest from an Apple brand store might be a more sustainable solution.
Use a simple CRM to manage your value chain
Optimization tips can be helpful, but the real secret to managing your value chain is a powerful CRM. Value chains may be useful, but they require analyzing and tracking a massive amount of data across your entire company. That’s a tall order for any administrative team—and a headache for your department leads.
With efficient and simple CRM software, you can track data and communication automatically, which means nothing has to be compiled or searched for when it comes time to analyze your value chain. Zendesk Sell combines on-demand data reports with impeccable communication so that nothing falls through the cracks. Thanks to a customizable and intuitively designed sales dashboard, your company can collect the data you need without wasting resources.
Want to improve customer service as part of your value chain? For a streamlined, automated, customer-oriented experience, combine our CRM power with Zendesk for service. Our contact management platform and lead generation software make it simple to find clients, while our service software makes it easy to keep them around. Request a demo today and start increasing the value of your company.