Article Contents:
Each business is unique.
Even you and your competitors are operating in the same industry, there is no need for both business should have same cost structure or value chain.
The cost structure will vary from business to business depending on your manufacturing process, where you are doing, the type of customer you are servicing, volume and variety, your supply chain practices, tax structure, your investment, debts and your profit expectation.
Being aware of your organization value chain or cost structure will give more competitive advantage in leveraging it for maximizing the profitability and growth.
In this article, let us understand about value chain and how you can leverage it with real examples from small business.
What is meant by Value chain in a business?
In business, a value chain refers to the series of steps a company takes to transform raw materials into the final product or service that is delivered to customers.
Each step adds value to the product, hence the name “value chain.”
And each step, cost is being built into it. That is value chain cost or cost structure.
This concept helps businesses analyze and optimize the processes involved in creating their products or services to improve efficiency, reduce costs, and increase customer satisfaction.
The value chain typically includes the following primary activities:
- Inbound Logistics: Receiving, storing, and managing the raw materials required for production.
- Operations: Converting raw materials into finished products through manufacturing or production processes.
- Outbound Logistics: Distributing the finished products to customers
- Marketing and Sales: Promoting and selling the products to customers.
- Service: Providing post-sale support and services to customers, such as maintenance, repairs, or customer service.
In addition to these primary activities, the value chain also includes support activities that help improve the efficiency and effectiveness of the primary activities.
These support activities include:
- Research and development, as well as technological improvements to enhance production processes and products.
- Human Resource Management: Recruiting, training, and managing employees.
- Firm Infrastructure: Organizational structure, management, planning, and quality control systems that support the entire value chain.
- Finance and accounting
Now, having understood the value chain in terms of activities, let us explore it in terms of VALUE CHAIN COST and its implication on the business to gain or lose in the market.
Typical Example of value chain in a small business
Given below the typical manufacturing company’s value chain with cost.
The terminology will vary from company to company, but the cost structure will follow the same to arrive the selling price of the product.
For example, if you are selling a product for Rs 2500, it has a cost breakup viz Material cost Rs 500 + Process cost RS 350+ Factory Fixed cost Rs 250+ Quality Cost Rs 200+ Factory non fixed cost Rs 300+ Logistic cost Rs 100 + Tax Rs 300 + Profit margin Rs 500. That is value chain cost.
In this above example, where do you have control or influence?
selling price?
No, Mostly selling price is determined by the market based on supply vs demand.
If you want to increase your selling price, you need to position your product as premium or bring it as NEW PRODUCT to market to get the advantage of premium.
Profit?
No.
Profit margin is also dictated by the trade or industry you are in. Each trade expects minimum level of profit margin, then only it is competitive to be in the trade or industry.
Likewise, TAX is governed by law and you can not control on it.
where you have control is in ALL the cost mentioned in the above example.
For instance, if you reduce your process cost from Rs 350 to Rs 300 through waste elimination or reduction in the process, either you get the Rs 100 as your profit or you can pass it to customer, thereby you can sell it for Rs 2400 and by that way, you can get more volume from the market.
How CEO can leverage the value chain for competitiveness?
Understanding the value chain can provide significant benefits to a CEO of a small business in several ways:
Identify Efficiency Improvements:
- By analyzing each step in the value chain, the CEO can identify areas where processes can be streamlined or costs can be reduced. This could involve improving logistics, enhancing production methods, or optimizing procurement practices.
Enhance Customer Value:
- Understanding the value chain helps the CEO identify how each activity contributes to customer value. This knowledge can be used to enhance product quality, improve customer service, or offer better support, leading to increased customer satisfaction and loyalty.
Focus on Core Competencies:
- The CEO can identify which activities are core to the business and which can be outsourced. By focusing on core competencies, the business can improve its strengths and achieve a competitive edge.
Better Resource Allocation:
- A clear understanding of the value chain helps the CEO allocate resources more effectively, ensuring that critical activities receive the necessary investment and attention.
Identify Competitive Advantages:
- The CEO can pinpoint unique strengths or capabilities within the value chain that differentiate the business from competitors. These advantages can be leveraged in marketing and sales strategies.
Strategic Planning:
- Insights from the value chain analysis can inform strategic decisions, such as entering new markets, developing new products, or forming partnerships. This ensures that the business is aligned with its strengths and market opportunities.
Cost Control:
- By examining each component of the value chain, the CEO can identify cost drivers and implement measures to control or reduce costs without compromising quality or customer value.
Benchmarking and Continuous Improvement:
- The CEO can use the value chain as a framework for benchmarking against competitors or industry standards. This ongoing evaluation can drive continuous improvement initiatives.
In summary, a thorough understanding of the value chain equips the CEO of a small business with the insights and tools needed to optimize operations, deliver greater value to customers, and strategically position the business for long-term success.
