Value Chain Analysis and Customer Value

Thu, 08/04/2011 - 10:06 -- Umar Farooq

Michael Potter proposed the value chain as a tool for identifying ways to create more customer value also called value chain analysis.  Every firm performs  activities in order to design produce, market, deliver and support its product. The value chain identifies nine strategically relevant activities that create value and cost in a specific business. 

Primary Activities

These primary activities represent:

  1. The sequence of bringing materials into business – in-bound logistics.
  2. Converting them into final products – operations.
  3. Shipping out final products – outbound logistics.
  4. Marketing these product – marketing & sales.
  5. Servicing these products – services.

Support Activities

Four support activities are

  1. Procurement
  2. Technology development
  3. Human resource management
  4. Firm’s infrastructure

The firm’s task is to examine its costs and performance in each value creating activity and look for ways to improve it.  The firm should estimate its competitor’s costs and performance as bench marks against which to compare its own costs and performance.  To the extent that it can perform certain activities better than its competitors- it can achieve a competitive advantage.

The firm’s success depends not only on the individual departmental efforts but also on the co-coordinated efforts of all the departments.  It has to ensure that departments interest instead of their individual interest.

If there exists certain level of friction among various departments, the solution is to place more emphasis on the smooth management of care business processes.  The core business processes include.

  1. New product realization:  activities involved in research, development and launching of new product.
  2. Inventory management:  Inventory level is management.
  3. Customer acquisition and relation:  Activities included in funds and retaining customs.
  4. Order to remittance:  Activities involved in receiving and approving orders, shipping product on time and collecting payments.
  5. Customer Service:  All the activities involved in making it easy for customers to reach the right parties with in the company for quick and satisfactory services answer and trouble shooting.

Strong companies develop superior capabilities in managing these core processes. Besides, to be successful, the firm needs to create a superior value determines network, called supply chain.