For those who study or have studied careers, postgraduate degrees, specializations or a course related to Business Management, they have had to hear about the Value Chain at least once. What's more, they have probably read different authors who talk about it and in the end they realize that they all describe it in a theoretical way, but they rarely explain how it applies to a real case.
At this point it is very likely that you, dear reader, conclude that you have only been shown the graph that Michael Porter presented more than 3 decades ago and the only thing that they have asked of you in your multiple tasks and jobs is to identify which areas go in each box. For this reason, we are going to understand how you can take real advantage of this administrative concept so mentioned in books, classes and research papers.
Defining basic theoretical aspects
Let's start by defining the terms separately. In the first place, the term chain means "linear succession of elements linked together" (RAE, 2019). Taken into a business context, we can say that it is a set of facilities and / or processes for the manufacture of a product or the performance of a service through a successive process.
Second, the term value means “degree of utility or aptitude of things to satisfy needs or provide well-being or delight” (RAE, 2019). Taken into a business context, we can say that it is the level of importance that users and customers give to a product or service for which they are willing to pay.
So, we can conclude that the Value Chain is a set of interlinked processes destined to deliver a good or service that satisfies the needs for which the customer pays.
Understanding the components of the value chain
We already know the graph of the generic value chain introduced by Michael Porter:
Analysis of the value chain and strategy profiles
Taken from
It is not the objective of this article to explain each of the boxes drawn, but if it is necessary to make some premises clear:
- Primary activities are primarily intended to create value for the external customer Support activities are primarily intended to create value for the internal customer The above two premises have their exceptions Throughout the entire value chain analysis the margin should not be lost sight of (gain)
Now, something very important to take into account before explaining how to apply value chain analysis in the company is that the Michael Porter model does not necessarily apply to each and every one of the companies. So is Michael Porter wrong? The answer is no. The value chain graph must be understood as a model, which must be adapted to the reality of each situation to be analyzed. For example, for a factory with large sales volumes, a large production facility, and hundreds of workers, each of the boxes will definitely represent a specific area or management. On the other hand, in a small company with few employees, who perform multiple functions, the boxes will represent processes, some own and some outsourced. The important thing here,It is to identify which person or area is responsible for each of the activities that will fall in the boxes.
Applying the value chain analysis
Identify activities
The first thing to do is to adapt the graph to the real structure of the company to be analyzed, placing the areas / processes in the respective order and pointing out the most important processes in each box, also known as key processes. If you suddenly get an extensive list of processes, we should not panic. Go through it 2-3 times and you will find that some processes turn out to be part of larger ones, thus narrowing down the list.
Care must be taken to identify the key processes at each stage. At this point it is not necessary to go into meticulous detail. What is important is to identify those responsible for each process, whether they are their own or outsourced.
Identify costs
The cost "is measured as the monetary amount that must be paid to acquire, transform goods (cost elements) and services" (Ortega, nd). Now, we must differentiate what is cost from what is expense. While costs are intended to produce profit or profit, expenses are resources that are not recovered being linked to the activity of managing and selling the good or service (Altahona, 2009).
With clear concepts, the next step is to identify all the costs and / or expenses associated with each link in the chain; that is, how much money each of the boxes in the graph represents. This point should be done with the support of an accountant.
At the end of the first two points we should have a graph similar to the one shown below:
Analysis of the value chain. Costs
Determine customer value
This step consists of fully knowing what our customers think about our product or service. Are they satisfied with the price, availability, quality, after-sales service, etc.?
To achieve this objective, techniques such as surveys, interviews, focus groups and the like can be used. The important thing is to be able to identify very well which aspects increase and which aspects decrease the satisfaction of our clients; that is, which processes are adding value and which processes are not.
For this type of measurement, it is suggested to hire the services of a specialist.
Analyze processes and identify improvements
This point can be the most complicated, since many times "there is no time" to stop to standardize processes and write manuals, or simply "everyone knows what they have to do". If in your company you hear these phrases or you express them yourself, it is time to consider whether these work policies are the most appropriate.
What is not measured can not be improved. For example, how do I know if my sales are going up or down if I don't keep a sales record? How can I know if my old production machine is more convenient than a new one if I don't keep track of maintenance expenses? Standardizing your processes will help you to detect improvements to be made, what's more, you will be able to identify which changes can have the greatest positive impact on your results so that you focus your efforts only on what really matters. But, how will I know which of all the processes that are carried out on a daily basis in the company is the one that I must intervene? The answer is simple: the one that is generating dissatisfaction with your client.
To better understand the idea, let's take an example. Let's say that as a result of your satisfaction survey you found that they are satisfied with the price and quality of the product, however 3 out of 10 deliveries arrive late. After knowing these results, it would not make sense to find a way to reduce the price or improve the quality, you would only invest time and resources in vain. Rather, it would be necessary to determine the reason for the delays in delivery and what alternative solutions exist.
Calculate the economic impact
It was previously indicated that throughout the analysis of the value chain, the margin should not be lost sight of. Well, any action we take to increase customer value must keep the profit margin within the expected margins.
Taking the example of delays in dispatch, suppose that it was identified that the problem is due to the fact that the fleet is made up of 2 trucks with more than 20 years of life and that therefore have constant failures generating the delays. Now, as an alternative solution, a quote was made with a merchandise transport company, which will cost S /.23,000 and will guarantee that at least 9 out of 10 deliveries arrive on time. Then, customer satisfaction would improve (value increase) and the margin would not drop below 10%, which means that it is feasible to make the change in our value chain.
But, what would happen if the cost were S /.28,000? We would be reducing the margin by S /.3,000. Well, at this point there are two options: be willing to slightly reduce the margin to increase the value for the client or look for another process where the cost or expense can be cut by S /.3,000, so that the margin is not affected..
Conclusions
So, dear reader, we close this article with these brief conclusions:
- The value chain is a management tool, not a concept or a graph Its true utility lies in being able to identify which areas and / or processes make up each link and what their contribution is to the company's cost structure In conjunction with a correct analysis of processes and an accurate measurement of the level of customer satisfaction will be of great help to formulate strategies that help increase the value for the customer It is not advisable to increase the value with actions that reduce the margin below what is expected
In a future article we will talk about the main strategies that can derive from a correct analysis of the value chain.
Bibliography
D'Alessio, F. (2008). The Strategic Process: A Management Approach. Mexico: Pearson Educación de México SA Obtained from
Altahona, T. (2009). Practical Book on Cost Accounting. Bucaramanga: University of Research and Development: Faculty of Business Administration. Retrieved on September 15, 2018, from
David, F. (2003). Concepts of Strategic Management (9th ed.). Mexico: Pearson Educación de México SA.
Hill, C., & Jones, G. (2009). Strategic Administration (8th ed.). Mexico DF: Interamericana Editores SA
Ortega, J. (sf). Cost accounting. sl Retrieved on September 8, 2018, from
RAE. (2019). Spanish dictionary. Retrieved on January 21, 2019, from the Royal Spanish Academy:
