Value Creating Process

We have deliberated earlier on value analysis of a product and now I am writing about the entire process here.

The activities of all companies in an industry can be analysed by a theoretical tool known as value chain. A value chain recognises and separates the different economic values adding activities such as separating a product, reducing the cost and  meeting customer’s needs immediately that occur in some way in every firm. It projects activities required to create value of customers of a given product or service. Value chain analysis, thus, offers an excellent means by which managers can find the strengths and weaknesses of each activity vis-à-vis the firm’s competitors. It makes clear where low cost benefits occur and in what way each activity can be undertaken so as to identify it from that of a business company’s competitors; how to deliver satisfaction to customers as fast as possible etc. Business is viewed as a process, a chain of activities in order to find the strengths and weaknesses of a firm operating in a competitive environment. Competitive advantage is created and sustained only when a firm is able to perform the most essential functions either more cheaply or better than its competitors.

The value creating activities of a firm can be divided into two categories: Primary activities and secondary activities. Primary activities represent the important tasks a firm acts to produce and deliver a product or service to a customer. These include incoming logistics, operations, outbound logistics, marketing and sales, and service. Support activities work to enhance or to help the functioning of basic or primary activities.  These include the firm’s infrastructure, human resource management and technology development and procurement.

Primary Activities

Inbound Logistics: Activities such as materials handling, warehousing and inventory control, used to receive and spread widely as inputs to a product.

Operations: Activities necessary to convert the inputs provided by inbound logistics into final product form. Machining, packaging, assembly and equipment maintenance are examples of operations activities.

Outbound Logistics: Activities involved with collecting, storing and physically distributing the final product to customers. Examples of these activities include finished goods storing materials and order processing.

Marketing and Sales: Activities completed to provide means through which customers can purchase products and to pursue them to do so. To market with positive results and sell products firms develop advertising and promotional programs, select proper distribution channels, and select to develop and support their sales force.

Service: Activities that are meant to maintain a product’s value. Firms may have a range of service related activities including commissioning, repair, training, and adjustment.

Each activity should be examined relative to competitors. Accordingly firms rate each activity as better, equal or below par.

Support activities

Firm Infrastructure includes activities such as general management, planning finance, accounting, legal support and governmental relations that are required to support the work of the entire value chain. Through its infrastructure the firms and businesses put great efforts positively determine and consistently identify external opportunities and threats, identify resources and capabilities and support internal strengths.

Human resource Management:  Activities involved with recruiting, hiring, training, developing, and compensating all personnel.

Technological Development: Activities completed to improve a firm’s product and the process to manufacture it. Technological development takes many forms,  such as  process equipment, basic research and product design, and servicing procedures.

Procurement: Activities completed to purchase the inputs needed to produce a firm’s products. Purchased inputs include items fully consumed during the manufacture of products e.g. raw materials and supplies as well as fixed assets – machinery, laboratory equipment, office equipment and buildings.

Each activity should be examined relative to competitors’ abilities. Accordingly firms rate each activity as better, equal or below par.

The combination of both primary and support activities determines the firm’s basis for creating value. Managers can look into the various important actions closely and find whether they are doing the job better than their competitors (low cost, better quality, faster delivery etc.). Such a comparison helps the firms as a whole to find its own strengths and weaknesses when compared to others in the field.

This type of exercise about the whole process and product comparison with competitors must be undertaken with appropriate frequency to stay ahead in the market race.

  • Benj

    The concept you mentioned above looks pretty much like Porter’s Value Chain Model.