At this point in the sales market, there’s no such thing as a truly unique company or product. With hundreds of overlaps in product types, product features, company values, and overall pricing, it’s challenging to stand out from the crowd and even harder to do so without blowing your budget. Show
Value chain analysis lets you pinpoint the costs and values of every aspect of your business so that you can put your best foot forward and increase your profit margin. When you know exactly where to make cuts or increase investments, you have the power to revitalize your supply and sales chains for maximum benefit. In this article, we’ll take you through a full explanation of value chain analysis and how it can guide your company toward a more profitable future. What is value chain analysis?Value chain analysis (VCA) is a tool used to increase the profit margin for a company by looking for improvements in specific activities along the production and sales lines. Ideally, by discovering opportunities for cost reduction and/or improved customer value, your company can decrease production costs and increase revenue. Value chain analysis is your path to outperforming the competition and becoming the leading company in your particular field. Just as sales metrics and analysis indicate trouble spots in your sales process, value chain analysis indicates the trouble spots in your production process. You can’t fix what you can’t see. Value chain analysis importanceIt’s clear that value chain analysis increases profit margin, but the importance of VCA goes far beyond revenue alone. The VCA process is all about streamlining and alignment. When done right, it not only boosts profits, it also:
While sometimes time-consuming, this sales analytics tool is one of the best ways to pinpoint improvement opportunities in your company. Porter’s VCAOur current model of the value chain comes from Michael Porter’s 1985 book, Competitive Advantage. Considering how quickly trends move in sales, the fact that we still use this model speaks to how well it works and how much it’s benefitted companies over the years. Porter breaks VCA into five primary activities and four secondary activities that together create value greater than the cost of performing those activities. That premise makes sense: Profit is created when the overall cost of producing your product is less than the amount you sell that product for. However, it’s common to see companies that don’t track all aspects of product creation and therefore miss opportunities to increase profit margins. That’s why we use the value chain analysis chart. Value chain analysis chartImage courtesy www.edrawsoft.comThe VCA chart is broken into two sections: primary activities and supportive (or secondary) activities. Primary activities focus on the manufacturing of goods and services, while secondary activities back up primary activities. Primary activities include:
Secondary activities include:
The key to a successful value chain analysis is figuring out which processes are having issues and then implementing fixes in a timely fashion. How to do a value chain analysisThere are two primary ways to look at value chain analysis depending on how you’re trying to edge out the competition:
Let’s take a closer look at both types of analysis. Cost advantage analysisCost advantage is all about lowering. You want to lower both the cost of production and the cost of products. If your company is aiming to do a cost advantage VCA, then you have a product that can be easily mass-produced and holds higher value as a low-cost item rather than a high-quality item. Great examples of companies that use cost advantage VCA are McDonald’s and Walmart. They use low-cost production to sell massive amounts of products to customers on a daily basis with an emphasis on quantity over quality. The science of salesIn this free ebook, you’ll learn what it means to forgo educated guesses in favor of strategies that are measurable, repeatable, and insightful. There are five steps to the cost advantage analysis VCA:
Differentiation advantage analysisIn contrast to cost advantage analysis, differentiation analysis seeks to set a company apart for its product quality and brand value. Sometimes, this process can actually increase production costs, but as long as your overall profit margin increases, that’s fine. Prominent examples of companies based on differentiation advantage VCA include Apple and Starbucks. Both of these companies sell relatively high-cost, high-quality products with high customization. They win over their customers with branding, features, and other non-financial aspects of their products. For example, you don’t buy a pumpkin spice latte because your wallet says it’s a good idea; you buy it because society now associates it with fun, status, and the essential fall Instagram picture. There are three steps to differentiation advantage analysis:
Value chain analysis exampleHere is a value chain analysis example for a common supermarket. Primary activities include:
Secondary activities include:
Based on low costs (inbound logistics and service), long hours (operations), and large amounts of distribution (procurement and outbound logistics), we can look at this example from a cost advantage point of view, meaning we’re looking for an opportunity to lower costs. Overall, percentages look good for this company:
So, what could the supermarket do to increase its profit margin? Let’s take a look at our service primary activity. Universal returns is a policy that adds a lot of customer value and brand credibility, but it’s also a policy that costs mass production companies a significant amount of money. Because we’re looking at this company from a cost advantage point of view, it might be worth it for the supermarket to re-examine the return policy. Supermarkets carry some items which can be reused and some which lose value upon sale (for example, produce). Keeping the refund policy but limiting it to non-perishables cuts back on losses and increases the profit margin while still allowing some refunds (maintaining brand credibility). Use sales reporting software to help manage your VCARunning a full VCA requires a massive amount of data; the last thing you want is to end up spending more time and effort on a value chain analysis than it’s worth. A sales CRM like Zendesk Sell gives you on-demand data whenever you need it. With an easy-access and intuitively designed sales dashboard, your company can compile the data you need without wasting resources. Request a demo today and see how data-driven value chain analysis can rapidly increase your profit margin. The science of salesIn this free ebook, you'll learn what it means to forgo educated guesses in favor of strategies that are measurable, repeatable, and insightful. The science of salesIn this free ebook, you'll learn what it means to forgo educated guesses in favor of strategies that are measurable, repeatable, and insightful. Read now How does a value chain analysis help companies to develop a competitive advantage?A value chain analysis helps decision-makers understand which activities are most valuable and which ones could be optimized (perhaps even eliminated through technology and automation) to give the business a competitive advantage.
What is value chain analysis how it is used?What Is Value Chain Analysis? Value chain analysis is a means of evaluating each of the activities in a company's value chain to understand where opportunities for improvement lie. Conducting a value chain analysis prompts you to consider how each step adds or subtracts value from your final product or service.
How can value chain analysis be used to identify corporate strengths and weaknesses?Value chain analysis identifies the separate activities and business processes that are performed from the designing of a product to supporting it. Value chain analysis is viewed as a means of evaluating a firm's strengths and weaknesses. It assumes that a firm's basic economic purpose is to create value.
How value chain analysis is helpful in strategic decision making?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.
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