In the last post on value chains we looked at what a value chain is and what it is use for. In this post we are going to look at the steps involved in performing an internal value chain analysis.
The methodology for constructing and using a value chain involves four steps:
Step 1: Identify internal value chain activities
The first step is to assess all the discrete activities that create value in fundamentally different ways. Each of these activities should be distinctively different:
- Costs
- Cost drivers
- Assets
- Involve different personnel etc.
Secondly look at the big picture by separating out three categories of value chain activities:
- Structural (e.g number and location of stores)
- Procedural (e.g. quality control, training)
- Operational (e.g. donut production, distribution)
It is best to focus on structural and procedural activities as this helps you to plan for the longer term.
Step 2: Determine which activities are strategic
To determine which activities are strategic a company must identify which product characteristics are valued by existing customers. You should then find characteristics that it can exploit, and thereby create value for future customers. Examples of these characteristics are quality, service, or any tangible or intangible product features.
Step 3: Trace costs to activities
This is probably the hardest step as you need to use your accounting system to trace costs to different value chain activities. This is important for a company to focus on these value-added processes, so they will be able to manage them more efficiently.
Step 4: Improve management of value chain analysis
To achieve a competitive advantage a company must manage their value chain better than their competitors. This means reducing a company’s total cost while enlarging the competitive advantage. This does not however mean that all costs have to be reduced, it means that all costs that do not adversely affect the competitive advantage can and should be reduced.