Strategic Tool Box Serie (#7) : Porter’s value chain. Adjust your organization to your ambitions.

Introduction

Have you ever thought about refocusing or, on the contrary, diversifying your business activity? Outsource certain activities or simply reorganize them? Do you want your company’s key skills to best serve your competitive advantage and allow you to create additional gains compared to the average in your industry?

If you answered yes to any of these questions, then you will certainly be interested in this article where I present to you a very effective analysis tool called Porter’s Value Chain.

The value Chain : what is this ?

The value chain is a concept developed by Mickael Porter in 1985 consisting in schematizing the company as a series of interconnected activities which each develop a more or less strategic and important value for the company. It is used to describe the combinations of activities put in place in the company in order to create a competitive advantage and propose an interesting commercial offer for its customers.

Studying a company’s value chain consists of identifying its key activities, namely those which, by their nature or organization, provide a competitive advantage allowing the company to differentiate itself in its sector of activity.

Discerning these activities makes it possible to identify the key success factors on which the company will base itself to work on its positioning in order to create a profit annuity, that is to say a stable activity with high remuneration.

The value chain: how does it work?

This?value chain is made up of several activities that are consistent with the overall value provided by a company. The purpose of the chain analysis is to assess the activities taken individually and which contribute or not to obtaining the benefits. It will also identify the cost of these activities.

The value chain and its activities

Defining a value chain makes it possible to analyze the cost of activities and to manage to optimize or reduce them. Professor Mickael Porter believes that these activities fall into two categories. Thus, it will be necessary to distinguish the main activities from those of support : main activities and support activities.

MAIN ACTIVITIES

In the company, these are at the level of several positions. These include, among others:

? Internal logistics: receipt of goods and raw materials,

? Production: transformation of raw materials,

? Marketing and sales: implementation of strategies that can lead the customer to buy a product

? There are also services which are techniques put in place to increase or maintain the value of a product or service

SUPPORT ACTIVITIES

In addition to core activities, a value chain also depends on its supporting activities. Among these activities, you have:

? Procurement: purchase of supplies at the right price

? Development and research as well as technological development: technological progress offers a real competitive advantage to companies

? Human resources management: recruitment, personnel management, remuneration, etc.;

? There is also administration, which is an activity ranging from management to support functions.

How to use the value chain in your company?

In my opinion, there are two ways to perform a value chain analysis, depending on how you want to gain an edge over the competition:

? Cost advantage analysis: to attract customers with low prices

? Differentiation advantage analysis: to attract customers with unique advantages

Let’s take a closer look at these two types of analysis.

->?Cost Advantage Analysis (CAA)

For a cost advantage analysis (Cost Advantage Analysis) the key word is?reduction. We seek above all to reduce the cost of production and that of the products. If your company intends to make a cost advantage CAA, it is because you have a product that is easy to mass produce, and more profitable at low cost than at high quality.

Among the companies using the CAA for cost advantage, we can note McDonald’s and Walmart. They use inexpensive production to sell astronomical quantities of products to their customers every day, focusing on quantity rather than quality.

For cost advantage analysis, the key word is reduction. We seek above all to reduce the cost of production and that of the products. If your company intends to make a cost advantage CAA, it is because you have a product that is easy to mass produce, and more profitable at low cost than at high quality.

Among the companies using the CAA for cost advantage, we can note McDonald’s and Walmart. They use inexpensive production to sell astronomical quantities of products to their customers every day, focusing on quantity rather than quality.

The cost advantage CAA involves five steps:

-Identification of primary and subsidiary activities.

You need to list all the activities needed to create the product, including supply chain management.

-Identification of the costs of each activity with regard to the total cost of the product.

If the total cost of producing a product is xx euros, what percentage of that cost comes from each activity? If you notice that one or two activities represent a large percentage of this cost, reduce them.

-Identification of the cost factors of each activity The cost factors are the quantifiable aspects of an activity. For example, labor cost factors are working hours, working speed (KPI), and salary.

-Identification of the links between the activities Some activities are linked, and the reduction of the costs of some can lead to the increase of the profits of the others.

-Identifying reduction opportunities It is impossible to reduce all production costs to zero but you can reduce them significantly. Look at where your biggest costs are coming from and make adjustments. Simple changes include reducing inventory variety, sourcing cheaper raw materials, changing suppliers, or automating some of your workforce.

->?Differentiation advantage analysis (DAA)

Unlike the cost advantage analysis, the differentiation advantage analysis seeks to differentiate the company by the quality of its products and the valuation of its brand. This process can actually increase production costs, but as long as your overall margin also increases, that’s not a problem.

Among the companies practicing DAA to the advantage of differentiation, we can note Apple and Mini Coopers. Both of these companies sell relatively expensive and good quality products with a high level of customization. They attract their customers with their brand, their options and other non-financial aspects of their products.

For example, you don’t buy an iPhone because your wallet tells you it’s a good idea, but because society now associates it with fun, with everyone’s social status.

The Differentiation Advantage Analysis has three steps:

-Identification of value-creating activities Once the list of all the activities has been established, note those that offer the most value for the customer. They can include marketing and branding, producing a different option or technology, etc.

-Study strategies for improving these activities to increase customer value If your product value comes from your brand credibility, look for ways to increase this activity. You can study social value-based selling and donate a portion of your profits to charity.

-Identifying Sustainable Differentiation Not all customer value improvements are sustainable. Look for improvements in your business that will continue to pay off over time.

Specific case: AB-Inbev value chain analysis

To make the exercise more concrete, I invite you to refer to a study of the porter value chain of the brewing group, and world number 1, AB-Inbev. The study was conducted by Taylor Byrne in 2018.

Access the original article here

Conclusion

To gain competitive advantage, an organization must work on its strategic capabilities, by mastering distinctive capacities, making them ideally dynamic to sustain competitive advantage over time and by necessarily mastering market prerequisites, i.e. threshold capacities.

Using this strategic tool requires a certain investment. However, it remains essential for organizations wishing to sustain their activities and reduce the chance factor. However, these tools have limits because what is true today will not necessarily be true tomorrow and was not true yesterday.

These analyzes are by nature frozen in time. They are a still photo of a specific moment. Moreover, they are not infallible and systematic. Analyzes that are too old can therefore lead to results that are unsuitable for current markets.

You like strategy & business development ?

If like me, you love to talk about strategy and business development in the field of industrial B2B and commodity products, don’t hesitate to subscribe to my newsletter, visit my blog, or follow me on LinkedIn.

My newsletter in strategy

https://www.dhirubhai.net/newsletters/6898585027056070656/

My blog in strategy & business development

https://redpointblog.com/

My LinkedIn page

https://www.dhirubhai.net/in/elodiecolinpetit/