What is value chain and its importance in strategic management?
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The support activities in the value chain analysis are necessary for supporting the primary activities to take place. The support activities in the value chain analysis have indicators. Such as:- Show
Collectively, all these support activities and primary activities create the value chain. The chain comprises an earnings margin because a markup over the cost of perming value-creating activities is customarily part of the price borne by buyers. Related: Seven Factors Model of Industry Analysis The usefulness of Value Chain Analysis:Large manufacturing companies often conduct value chain analysis to understand their internal cost structure and evaluate their strengths and weaknesses. The value chain assumes that a firm’s basic economic purpose is to create value. The strategy-constructing lesson of value chain analysis is that enlarged company competitiveness pivots on managerial efforts to essence company resources and talent on those skills and activities where the company can improve dominating expertise to assist its mark consumers. Read more: Steps of SWOT Analysis in Strategic Management Value chain analysis is a powerful managerial tool for identifying which chain activities have competitive advantage potential. The maximum significant claim value chain analysis depicts how a specific company’s cost situation compares with the cost positions of its rivals. What is needed are competitor-versus-competitor estimates for supplying a product to a market segment. Data derived from the value chain analysis can be used to compare a firm’s costs activity-by-activity against those of the competitors. Managers can also learn about the sources of cost advantages and cost disadvantages. When a manager understands the firm’s value chain, he/she can identify strategic options based on the strengths and weaknesses of each value-chain element. In value chain analysis, the most important learning is the linkages between value activities that contribute to competitive advantage. This has implications for strategy-making and implementation. Competitors cannot copy this aspect of the value chain because these are unique to the firm. Under the value chain analysis, cost-competitiveness depresses a company in the costs of on the inside executed happenings and on cost in the value chains of its suppliers and forward channel allies. A company’s relative cost position and overall competitiveness are linked with the entire industry value chain analysis system. A typical single industry value chain incorporates the ‘supplier-Related Value Chains,’ ‘company Value Chains’ and ‘Forward Channel value Chains.’  You are here: Home/ Management/ Operation/ Value Chain: Definition, Importance and How it Works What’s it: A value chain is the various activities within a business, supporting each other and contributing to creating value for customers. This concept provides a framework for visualizing which areas a company can add value to and how to do so. If successful, it could lead to higher profits. As a result, companies can increase perceived value and reduce costs consumed. Advertisement Satisfying customers requires and involves important activities. For example, a company must identify the needs and wants of consumers in the target market. They then develop the appropriate marketing mix. Next, companies order and purchase inputs from suppliers. They then ship it to the warehouse and process it at the factory. Once done, next, they send it to the customer. Then, the work does not end there. Companies must also ensure their customers are satisfied and get the benefits they intended when they have given up the money and got the product. So, for example, they provide after-sales service to enable customers to get the benefits they want. Or the company provides a customer complaint channel. These activities affect customer perceived value, such as quality and delivery time. In addition, they also consume costs. Thus, companies can focus on value creation efforts in each area by identifying the value chains involved. If successful, they can not only deliver a valuable product or service to their market. But, they can also save costs. In conclusion, activities in the value chain contribute to adding more value. Companies can maximize profits by creating value in every activity. It allows them to gain a competitive advantage and maintain it over time. Why is the value chain important?The value chain gives a framework for developing value creation strategies in the company’s operations. Two reasons why analyzing it is important for companies. Advertisement First, companies can focus more on key areas where value creation can be maximized. For example, it may add value to customers, make processes more efficient and effective, and save resource consumption. Second, the company secures money in the long run. Activities along the value chain contribute to customer satisfaction, whether directly or indirectly. So, by continuously examining value creation along the value chain, they can keep their customers satisfied and loyal. Success in doing so leads to strong and profitable relationships with customers. Focus on which areas and how the company can create valueMichael Porter proposes a value chain concept to identify areas where a company can create value. According to him, every company synthesizes various interrelated activities, from designing, producing, marketing, delivering to supporting products. These activities contribute differently to creating value. Some contribute directly to value creation. Meanwhile, others support operations to work efficiently and effectively. And, broadly speaking, they all contribute to customer satisfaction. Porter then divides these activities into two categories:
Primary activities include five subcategories. Meanwhile, supporting activities consist of four subcategories. Each category contributes to creating additional value while also incurring costs. Consequently, companies need to examine them in depth to create economic value in each activity. I mean, they can add value, reduce costs or, ideally, combine the two. If companies maximize the difference between the added value created and the costs involved, they create high value. Then, because the value is maximized and costs are minimized, they can gain maximum profit and competitive advantage. Advertisement Maintaining loyalty by continuously creating superior value.Creating value basically aims to keep customers loyal. They keep buying and prefer your product. So, by keeping them loyal, money continues to flow into your company. But, on the other hand, your company also has to compete with other companies to satisfy consumers. So, whether you succeed in making them loyal or not, it doesn’t just depend on your competitive strategy. But, it also depends on the competitor’s competitive strategy. For this reason, your current success and competitive advantage do not guarantee you will continue to gain it in the future. So, you have to make sure the value you create is superior. And you maintain it over time. It is a prerequisite for the existing competitive advantage to be sustainable. It requires you to monitor the value you create to stay relevant to your customers’ needs. If you succeed in doing so from time to time, your customers will be loyal to the company. It can result in a strong and profitable relationship in the long term. How does the value chain work?Let’s use Porter’s value chain approach. He divided business activities into two categories:
Primary activitiesPrimary activities include:
Support activitiesSupport activities include:
Creating value in each activityIn each activity in the value chain, the company can focus its value creation efforts. First, it can be by adding value. For example, it contributes to customer satisfaction, making them loyal or willing to pay a high price. Second, companies can also build efficient and effective processes or activities. It saves resources, lowers the costs involved. Both can contribute to creating economic value for the company. Advertisement Say your company strives to create customer satisfaction. Many ways do this, for example by:
The alternatives above make consumers happy with the company’s offerings. And, to do so, it requires activities along your company’s value chain to synergize. Case in point: Walmart’s superior supply chainNow, take Walmart as an example. The company is the world’s largest-grossing retail giant with revenues of US$559.1 billion in 2020 and has 2.3 million employees. Walmart can gain a competitive advantage and take a market leadership position in the retail business through an effective and efficient supply chain system. It allows companies to lower their cost structure and offer their customers daily low prices. So how the company does it, let’s focus on its logistics activities. The first is in procurement activities. Walmart works directly with manufacturers. As a result, it cuts costs by reducing the parties involved. Just imagine if Walmart bought from a third party like an intermediary – not the original manufacturer. The company may have to buy at a higher price. The intermediary requires money by charging a profit margin (markup). So, by buying directly from the manufacturer, Walmart does not bear the markup. The second is in logistics activities. Walmart builds a superior logistics network. Enterprise information technology facilitates efficient information between company inventories and suppliers. It allows goods to be available when they are needed by the customer. Walmart is also streamlining logistics processes through its cross-docking. The company does not involve additional storage to move goods. Instead, the company loads and unloads between trailers by moving from truck trailers to semi-trailer trucks. As a result, it saves costs because the company does not have to bear the storage costs. In addition, goods can be immediately sent to their destination. What is value chain and its importance?“The concept of the global value chain recognises that the design, production and marketing of many products now involves a chain of activities divided among enterprises located in different places. The value chain describes the activities required to bring a product from its conception to the final consumer.
What is a value chain in strategic management?The term value chain refers to the various business activities and processes involved in creating a product or performing a service. A value chain can consist of multiple stages of a product or service's lifecycle, including research and development, sales, and everything in between.
What is the importance of value chain in strategic planning?The value chain framework helps organizations understand and evaluate sources of positive and negative cost efficiency. Conducting a value chain analysis can help businesses in the following ways: Support decisions for various business activities. Diagnose points of ineffectiveness for corrective action.
How to make use of value chain analysis for strategic management?Value chain analysis (VCA) is a process where a firm identifies its primary and support activities that add value to its final product and then analyze these activities to reduce costs or increase differentiation. Value chain represents the internal activities a firm engages in when transforming inputs into outputs.
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