The Business Value Stream - Quality at the Source

For a company to understand its potential and make the most out of their services or product, it needs quality at the source. This is where Porter’s Value System comes into place. The Value System guides and tracks the entire Value Chain, from the supplier to the customer. In this chain or stream, the most important element or tool is the Value Chain.

What is the Value Chain?

The Value Chain is an idea, a concept that presupposes that every organization can be split and narrowed down to activities performed for different purposes. Once an organization is broken down, the chain allows its user to do a systematic evaluation of all organizational activities, as well as the connection and interaction between them.

What is the goal of the Value Chain, you might ask? The goal is to understand the business, it costs and sources. Cost management might be the primary objective for any organization, and there is surely a reason for it, but tracking and controlling it is the actual key to a business’s success. With the use of the Value Chain, such tracking can lead to an improved business position.

Basically, the Value Chain serves to display the value of the company. It consists of:

• Margin that differentiates the value activities’ cost and the total value.
• Value Activities that are distinguished by their performance in the produce of services and products.

Within any organization, there are five key primary categories of Value Activities: operations, inbound logistics, outbound logistics, service, and marketing & sales. For supporting of these categories, we can differentiate between technology development, organization infrastructure, procurement, and human resource management.

In the layout of the Value Chain’s inventor, Porter, competitive advantage can only be understood by looking at the organizational activities. It cannot be understood if you look at it as a whole. It goes as follows: services and products go through the Value Activities in the order you request and oversee them. Each of the activities give the product or service a specific value. It is that value that later translates into profit or margin. You can use the margin wherever you want: in human resources, marketing, bonuses, product development, etc.

Understanding Margin and Value Activities

As you know already, Margin is the difference between the cost of performing the value activities and the total created value. When it comes to Value Activities, there are two key types worth mentioning: Supporting and Primary.

Primary Activities

Primary Activities are directly related to the product creation or delivery and also include the support and assistance after the sale. These activities can be split into five generic categories:

• Operations – All activities related or associated to the creation of the offered product or service.
• Inbound Logistics – All activities related to the scheduling, storage, receipt, return, or allocation of materials, etc.
• Outbound Logistics – All activities associated with order processing, processing, storage, delivery, returns, and scheduling of products or services.
• Services – All activities linked to the maintenance, support, or product enhancement during and after delivery.
• Marketing and Sales – All activities associated with the value proposition presented to the target market, as well as the facilitation of the purchase and consumption of the same.

Which of these is most critical for the functioning of an organization depends on the organization itself. To bring quality to the core of your business, you need to be able to source the most important activities and place most of your focus on them. This is where the Value Chain helps you.

Supporting Activities

Supporting Activities are the activities that aim to support the Primary Activities discussed above. These activities provide technology, resource management, quality talent, and other functions required for the successful work of the primary activities. Let’s explore them a bit further:

• Procurement – All activities related to purchasing of finished goods and raw materials which are used to either create the products or deliver them.
• Technology Development – All activities related to the development and research of products and services, processes, and innovations.
• Human Resource Management – All activities related to pay, recruitment, discharge, and personnel replacement, as well as employee benefits and all that comes with compliance with the labor laws and regulations.
• Organization Infrastructure – All activities associated with planning, management, finance, legal, accounting, quality, and regulation.

How to Reach Quality at the Source

Porter lays out this system for a reason – to explain the competitive advantage and its importance. To make the most out of your business and find the ways to build it further, you must look at both the relevant and strategic activities it performs, as well as their interaction. All of your products and services will pass through the activities we described above, and if you learn to provide solid value, this will directly turn into profit or margin.

Combining the Value Chain and the Value Aspects

Porter’s Value Chain, however, doesn’t easily translate to specific aspects of the business we need to focus on when developing strategy. This is where the ten Value Aspects of the business activities and functions come in. There is a huge difference between the two, in the sense that Porter’s Chain is used to discern the elements that add value to the end service or product you provide to your customer, while the Value Aspects are the vehicle used to derive and deliver the value.

Stated another way: To truly define the best strategic advantage in your organization, you need the Value Chain tool to evaluate all activities that lead to customer value. On the other hand, the Value Aspects are perspectives of a specific organization that have to work together to create the value in products and services.

As soon as you get to the point when you need to execute, you’ll need to focus on the following ten Value Aspects:

1. Communication and Collaboration – The communication methods and the culture around the collaboration.
2. Finance and Accounting – The invoicing, payments, procurement, business capital utilization, collections, and daily transactions of the operation.
3. Human Resources – Concerned with the organization’s human side and the talent cultivation, assimilation, and acquisition within it.
4. Marketing – Concerned with tracking and defining the successful products and services, and the processes used to market them to the target market.
5. Organization Infrastructure – Concerned with legal, management, planning, leadership, information systems, government affairs, quality management, etc.
6. Procurement – Concerned with the inbound and outbound logistics, as well as purchasing.
7. Production Operations – Concerned with the process of turning people and materials into products and services.
8. Research and Development – Concerned with the product’s lifecycle.
9. Sales – The activities that promote the purchase of the product.
10. Service Delivery – Concerned with the delivery coordination of the products and services as requested and needed by the customer.

The most crucial element I found missing from the Value Chain, which I put at the top of the ten Value Aspects, is Communications and Collaboration. To me, it is the glue that, for all intents and purposes, binds the remaining components together, be it the components of the Value Chain model or the Value Aspects model.

As for the tools themselves, naturally, you need to focus on both to build up the business strategy. You start by using the Value Chain until you get to the point where you have a viable product or service of value and it is time to execute. When that time comes, you need the ten Value Aspects to break down the game plan into logical elements.

It should also be noted that the ten Value Aspects also come in handy when you are trying to measure the maturity of the organization. But that’s another article.

This is your roadmap to success – follow the Value Stream to identify and then create value in the products and services you offer, which in turn become the value you give to your customers. The only way to find the best strategy is by going deep into where value is created and then focusing your efforts on where value is delivered.