What is a Value Chain?
Most companies follow a system that allows them to operate activities to compete in any industry. Companies perform a wide array of discrete activities that affect their competitive position and profitability. Michael Porter a Harvard Business School Professor introduced the concept of the Value Chain Analysis, in his 1985 book Competitive Advantage: Creating and Sustaining Superior Performance. Which outlines a general framework of how businesses can identify activities to assess their relative cost and role by strategic planning to create value for their customers
The general framework assumed is that a company/business is a system that is composed of inputs, transformation processes and outputs, each activity involves the acquisition and consumption of resources [1]. Porter explains that an analysis of these activities can formulate competitive strategies, understand the sources of competitive advantage, identify and develop linkage and interrelationships between activities which in turn creates value. This value offered by a company to its customers outweighs the cost of producing it as a result increases the profit margin [2].
When designing your next big idea, often times the framework possibilities are overlooked. This guide serves to position your idea against competitors through the understanding of competitive advantage around your product and the value chain which is characterised into two main groups: the primary activities which include inbound logistics, operations (production of product), outbound logistics, marketing and sales as well as services. The support activities include administrative infrastructure management, human resource management, Research and Design and procurement.
Businesses across South Africa in all industries have a value chain however most do not acknowledge or analyse it. For example, within the African leafy vegetables in Limpopo Province a study into the value chain revealed that although small-holder farmers attain high gross margins, their intentions to take part in the main-stream markets are prevented by lack of technical advice on production, lack of packaging and processing services, poor infrastructure, deficiency of contractual agreements along the value chain and lack of access to finance [3]. Realisation of an analysis of the individual businesses into their value chain would have lead each small-holder farmer to uniquely identify value gaps within the limitations, as such a competitive strategy would have been formulated to produce the product that would be more appealing for the main-stream consumer market.
A small-holder Farmer growing umfino-morogo-miroho (African spinach) would know that the leaves start losing its nutritional benefits within days of harvest, keeping the leaves as cool as possible without freezing would increase the shelf life of the leaves, by keeping the harvest in a simple fridge [3] in the operation activity of the business, the product would stay fresh to be sold on the main-stream market. In this scenario value would have been added to the leaves uniquely giving a competitive advantage to the farmer.
The aim of investigating and examining the concept of value chain and the systems involved will aid your company/product to be structured more efficiently in the future and to recognise internal activities that are most valuable to ultimately increase sustainable competitive advantage.
Value Chain Model
The value chain cannot be understood by looking at the company as a whole, it can only be discovered through many discrete activities that the company performs in designing, producing, marketing, delivering and supporting its product [2].
A business obtains a competitive advantage by performing these activities strategically in order to be more cheaply or better than its competitors [2]. Essentially the value chain and the way it performs individual activities are a reflection of its history, its strategy, its approach to implementing its strategy and the underlying economics of the activities themselves [2].
The main goal of having a competitive advantage is to build and maintain an enterprise which should make it possible to achieve above-average results [4]. Which in most global economic circumstances can be relatively achieved, however trying to incorporate the same methodology within the borders of South Africa can be difficult. Value chain analysis largely focuses on economic sustainability and has paid inadequate attention to social and environment consequences of business behaviour. For a sustainable competitive advantage, social and environment aspects should be considered in the broader sense of the value chain [5].
With more co-corporation within and between each activity and the various actors along the chain with regards to sharing of information would lead to better decision-making and resource allocation for the business itself. Further when the chain acts with intent to partner with each other to develop systems and products that are fundamentally consumer preference driven, they become much more difficult for competitors to imitate [5]
Value Chain Creation.
Investment by transnational corporations, international trade and the Internet all have one thing in common, they are the main drivers of economic globalisation in the latter half of the 20th century [9]. Forming from these drivers two types of value chains where established: Producer-driven and Buyer Driven Value chains [10].
Producer-driven: where producers take responsibility for assisting the efficiency of both their suppliers and their customers. Within the supply chain capital and technology-intensive production supported by economies of scale drive the value chain since they play the central roles in coordinating production networks. This type of characteristic has high entry barriers as such industries in the automobile, aircraft, computers, heavy machinery etc. tend to favour this approach [10].
Buyer-Driven: are businesses in which play a pivotal role in setting up decentralised production networks in exporting countries typically located in developing regions. Production is generally carried out by tiered networks of developing countries contractors that are labour intensive industries that make finished goods for foreign buyers in industries such as consumer goods and consumer electronics. This type of characteristic tend to have low barriers to entry and are suited to large retailers, marketers, and branded manufacturers [10].
Value chain activities originate from isolating activities that are technology and strategically distinct [2]. As manufacturing companies have embraced lean thinking, assessing which activities are value-adding and which are non-value-adding has become a way to eliminate waste and improve productivity [6].
Primary Activities.
There are five generic categories involved in competing in any industry, of these categories each one can be divisible into a number of distinct activities, and these depend on the industry environment and the individual business strategy. These activities are directly linked with the creation or delivery of a product or service.
- Inbound Logistics: Activities associated with receiving, storing, and disseminating inputs to the product, such as material handling, warehousing, inventory control, vehicle scheduling and returns to suppliers.
- Operations: Activities associated with transforming inputs into the final product form, such as machining, packaging, assembly, equipment maintenance, testing, printing ad facility operation.
- Outbound Logistics: Activities associated with collecting, storing, and physically distributing the product to buyers, such as finished goods warehousing, material handling, delivery vehicle operation, order processing, and scheduling.
- Marketing and Sales: Activities associated with providing a means by which buyers can purchase the product and including them to do so, such as adverting, promotion, sales force, quoting, channel selection, channel relations, and pricing.
- Service: Activities associated with providing service to enhance or maintain the value of the product, such as installation, repair, training, parts supply, and product adjustment.
A company can focus on particular categories to obtain a competitive advantage depending on the specific industry it is involved in. for a goods distribution business focus on inbound and outbound logistics are most critical. For a high-speed copier manufacturer, a key source of competitive advantage would come from service. Whichever industry a business is in the generic categories would play some role in its competitive advantage [2].
Support Activites.
Each of the primary categories are linked to support activities which help to improve the effectiveness and efficiency of the primary activities. There are four generic categories.
- Procurement: refers to the function of purchasing inputs used in the business’s value chain that will allow a company to undertake its primary activities. Purchased inputs include raw material, supplies, and consumables, as well as assets such as machinery, laboratory equipment, office equipment, and buildings. Procurement employs a “technology”. Such as procedures for dealing with vendors, qualification rules, and information systems.
- Technology Development: activities associated into efforts to improve the product and the process. Every value activity embodies technology, from preparing documents to developing and enhancing new or existing products. Technology development does not solely apply to technologies directly linked to the end product and can take many forms, from basic research and product design to media research, process equipment design, and servicing procedures.
- Human Resource Management: activities relating to the management of the personnel within the organisation through processes and systems. These activities consist of recruiting, hiring, training, development and compensation. Human resource management affects competitive advantage through its role in determining the skills and motivation of employees and the cost of hiring and training.
- Firm Infrastructure: unlike other support activities infrastructure supports the entire chain and not individual activities. Typically consisting of a number of activities such as general management, planning, finance, accounting, legal, government affairs and quality management. Sometimes viewed as “overheads” however I can be a source of a powerful competitive advantage, for example proper management in information systems can contribute significantly to cost position.
It’s important to note that a value chain is more than a collection of independent activities as such these activities both primary and supporting make up an interlinked system, likewise creating a competitive advantage from these activities should not be rigid in methodology. [7] Argues that although a business implemented cost cutting solution by technology developments by measuring quantification of the business’s products. They saw that it both improves and is a detriment to the business when the technology output is applied broadly and in not specific areas. Employees manufacturing a simple task product inadvertently created a culture of “gamification” whereby the worker competes against their own numbers to better the output they produce, by measuring their output it boosted the company’s productivity. For complex skilled task the opposite was found to be true driving productivity down. The employees who manufacture the complex products that require higher levels of artisanship believe quantification to be an imperfect measure of their performance as they see their work as a “craft” and to focus on getting each unit made correctly thus the employees felt demotivated and devalued.
Objectives of Value Chain Analysis.
Value Chain Analysis examines whether a company is doing the correct things (being effective) while doing those things in the correct way (being efficient). Some of the key points that are as follows [8]:
- Effective at maximising opportunities for creating and delivering value in the eyes of the consumer.
- Efficient in adding value, producing, processing and distributing products at the least cost and with minimal waste.
- Understanding what consumer’s value in the product, and focus on creating and delivering this value throughout the chain.
- Develop strategic collaboration and operational cooperation throughout the chain.
- Strive for continuous improvement.
Value creation stands for a company’s commitment to structure all aspects of its core business (products and supply chain) in ways that deliver economic, ecological and societal value-add at the same time. Theses ways only arise where the approach is purposefully embedded within the company’s core business [11].
In order to align the business goals to support the entire company, a business strategy is formed from which it is the fundamental value proposition that the company offers to society. This is the core of the business specifically the combination of customers, sales channels, products, internal capabilities and markets. The core business of the firm and one in which it must excel in comparison to competitors and on which it must focus its resource development and investment [12].
The value chain is the backbone of the company and all of the important decisions and parameters are implemented in the value chain. The success in economic, ecological and societal terms, a significant proportion is accounted within the value chain [11].
Competitive Advantage.
When a company acquires or develops an attribute or a combination of attributes that allow it to outperform its competitors, it’s known as a competitive advantage, these attributes can come any number of capacities such as high-grade ore, inexpensive power or highly trained and skilled personnel. Competitive advantage covers a wide range of areas that exists when the business is able to deliver the same benefits as competitors but at a lower cost (cost advantage), or deliver benefits that exceed those of competing products (differentiation advantage) [13].
Competitive advantage can be divided into three generic strategies that offer specific forms of advantages to stay ahead of present or potential competitions. These generic strategies were realised as: cost leadership, differential and focus which is subdivided into cost focus and differentiation focus [2] [13]. [4]These strategies are formed from sources of primary and secondary activities. With recent findings of the evolution in the customer value that tends towards a more sustainable outlook in the product end-to-end lifecycle as well as societal and ecological activities make competitive advantage more complex and the relationships between sources and activities more unobvious [4]. Adaptation and specification to these generic strategies are crucial for the business success.
[1] P. C. Ensign, “Value Chain Analysis and Competitive Advantage,” Journal of General Management, vol. 27, no. 1, pp. 18-42, 2001.
[2] M. E. Porter, Competitive Advantage – Creating and Sustaining Superior Performance, New York: The Free Press, 1985.
[3] G. M. Senyolo, E. Wale and G. F. Ortmann, “Analysing the value chain for African leafy vegetables in Limpopo Province, South Africa,” Cogent Social Sciences, vol. 4, no. 1, p. 1509417, 2018.
[4] P. Cegliński, “The concept of competitive advantages. Logic, Sources and Durability,” Journal of Positive Management, vol. 7, no. 3, pp. 57-70, 2016.
[5] A. Fearne, M. Garcia and B. Dent, “Dimensions of sustainable value chains: Implications for value chain analysis,” Journal of Supply Chain Management, vol. 17, no. 6, pp. 575-581, 2012.
[6] W. Shou, J. Wang, P. Wu and X. Wang, “Value adding and non-value adding activities in turnaround maintenance process: classification, validation, and benefits,” Production Planning & control , vol. 31, pp. 1-18, 2019.
[7] A. Raganathan and A. Besnson, “A Numbers Game: Quantification of Work, Auto-Gamification, and Worker Productivity,” American Sociological Review, vol. 85, 2020.
[8] R. Collins and B. Dent, “A guide to value chain analysis and development for Overseas Development Assistance projects,” Australian Centre for International Agricultural Research, Canberra, 2015.
[9] G. Gereffi, “Shifting Governance Structures in Global Commodity Chains, with Special Reference to the Internet,” American Behavioural Scientist, vol. 44, no. 10, pp. 1616-1637, 2001.
[10] G. Gereffi, “A Commodity Chains Framework for Analysing Global Industries,” 1999.
[11] M. D’heur, Sustainable Value Chain Management: Delivering Sustainability Through the Core Business, 1st ed., Switzerland: Springer International, 2015.
[12] C. Smith, Core Business, Chichester West Sussex: John Wiley & Sons Ltd, 2015.
[13] W.-C. Wang, C.-H. Lin and Y.-C. Chu, “Types of Competitive Advantage and Analysis,” International Journal of Business and Management, vol. 6, no. 5, pp. 100-104, 2011.