In today's dynamic business environment, knowing and efficient management of the value chain is crucial for leaders of the future who strive to succeed. The value chain is an analytical tool that allows companies to identify and realize activities that contribute to creating benefits for customers. It is inextricably linked to a value proposition – a central component of each business model.
In February we promised to guide you step by step through the elements of the business model and show how to organise them in the context of sustainable development. peculiar attention will be paid to analysing their current state of affairs and planning effective changes. In this article we will look at what the value chain is, how it affects the value proposition and why it is simply a key component of the business model.
What is simply a value chain?
The Value Chain is simply a concept developed by Michael Porter in his book "Competitive Advantage: Creating and Sustainable Superior Performance". It consists of a number of activities that the company performs to deliver a product or service to the market. These actions can be divided into 2 main categories: basic and support actions.
Basic actions
Basic activities are all processes straight related to the creation of a product or service. These are:
- Internal logistics: receipt, retention and management of natural materials. An example is simply a production company that manages the supply of natural materials specified as steel or plastic to guarantee continuity of production. Efficient management of interior logistics can reduce retention costs and faster access to materials.
- Operations: processing natural materials into finished products. For example, in a car factory, operations include assembly of parts, varnishing, quality control and packaging. Optimisation of operations can lead to increased production efficiency and improved product quality.
- External logistics: distribution of finished products to customers. Logistics companies, specified as DHL or FedEx, specialize in effective distribution of products worldwide. Efficient external logistics ensures fast transportation of products to customers, which is crucial for their satisfaction.
- Marketing and sales: promotion and sale of products. Effective marketing and sales can increase brand awareness and attract fresh customers.
- Service: after-sales services specified as method support and guarantees. For example, Samsung offers method support for its products, providing aid to customers in case of method problems. Good service services can increase client loyalty and improve company reputation.
Support actions
Support actions are processes that support and enable basic actions to be effectively implemented. These are:
- Company infrastructure: management, strategical planning, finance. An example is simply a consulting company that offers consulting services for strategical and financial management. Efficient company infrastructure allows for better resource management and achieving business objectives.
- Human resources management: recruitment, training, worker development. For example, Google invests in the improvement of people employed through training programs and career opportunities. Efficient management of human resources can lead to increased motivation and productivity of workers.
- Technological development: investigation and development, technological innovation. An example is Tesla, which invests in investigation on fresh technologies, specified as autonomous vehicles and high-capacity batteries. Technological innovation can make fresh products and services that attract customers.
- Supply: acquisition of natural materials and materials. Nestlé, for example, manages the acquisition of natural materials specified as cocoa and milk to make its food products. Effective supply can reduce costs and guarantee continuity of production.
Value Chain and Value Proposal
Value proposition is simply a key component of a business model that defines what benefits the company offers its customers. This is simply a promise of quality that the company provides through its products or services. The value chain is crucial due to the fact that each part of it contributes to the creation of goods for the customer.
Relationship between the value chain and the value proposition
- Operational efficiency: Improving operating processes in the value chain can lead to lower production costs, allowing the company to offer competitive prices. For example, Toyota has introduced a "just-in-time" production strategy that reduces retention costs and increases production efficiency.
- Product quality: Support actions, specified as technology improvement and human resources management, can increase product quality, which translates into higher value for the customer. An example is Apple, which invests in investigation and improvement to make innovative high-quality products.
- Delivery speed: Efficient interior and external logistics ensures fast transportation of products to customers, which is an crucial component of the value proposition. Amazon invests, for example, in the improvement of its logistics infrastructure to guarantee fast transportation of products worldwide.
- Customer service: Service activities, specified as method support, can increase client satisfaction and strengthen the value proposition. An example is Zappos, which is celebrated for its excellent client service and offers free returns.
Importance of the value chain in the business model
The value chain is not only an analytical tool but besides a strategical tool. It allows companies to identify areas where they can separate themselves from competition and supply exceptional value to their customers. Integrating value chain analysis into the business model helps companies:
- Understanding Costs: Value chain analysis allows companies to realize where costs arise and how they can be reduced. For example, Walmart uses value chain analysis to identify areas where operating costs can be reduced, allowing lower product prices to be offered.
- Identify sources of value: companies can identify activities that contribute the most to creating value for customers. An example is Starbucks, which invests in the quality of its products and client experience to make a unique value proposition.
- Optimise processes: improving efficiency in the value chain leads to better productivity and higher quality of products. For example, General electrical introduced the Six Sigma program, which allows to optimize production processes and improve product quality.
- Create a competitive advantage: Companies can usage value chain analysis to make a unique value proposition that distinguishes them on the market. An example is Nike, which invests in technological innovation and marketing to make a unique value proposition for its customers.
The European Standards for Sustainable improvement Reporting (ESRS) usage the word ‘value chains’ in a single number, even though individuals may have multiple value chains. This is crucial due to the fact that the value chain includes all activities, resources and relationships that contribute to the unit's value creation, from natural materials acquisition to transportation of the finished product to the final customer.
Value chain in the context of the ESRS
The ESRS value chain includes entities at higher level (upstream) and lower (downstream) the level of the unit. Entities upstream those which supply the natural materials, components or services essential for production. Examples of actions upstream include:
- sourcing of natural materials: selection of suppliers and acquisition of natural materials specified as metals, wood or chemicals;
- transport and logistics: the movement of natural materials to production facilities;
- storage: Pre-production retention of natural materials.
Entities downstream are those active in the distribution, sale and handling of finished products. Examples of actions downstream include:
- packaging: preparation of products for dispatch;
- distribution: transport of finished products to outlets or straight to customers;
- marketing and sales: promotion and sale of products;
- after-sales service: method support, service and returns management.
Importance of value chain management
Managing the value chain is crucial for sustainable improvement as it allows companies to identify and minimize negative impacts on the environment and society at all phase of production and distribution. In the context of the ESG (Environmental, Social, Government), value chain management includes:
- risk and chance assessment: recognition of possible risks and opportunities associated with upstream and downstream activities;
- environmental impact management: monitoring and reducing CO2 emissions, water consumption and another natural resources;
- Corporate social responsibility: guarantee fair working conditions, respect for human rights and support for local communities;
- corporate governance: transparency and work in managing relations with suppliers and customers.
Examples of application of value chain management
In the clothing industry, companies must manage a value chain that includes fabric suppliers (upstream), clothing production, distribution to shops and marketing and sales (downstream). In the context of the ESG, these companies must monitor working conditions in factories, the usage of water and chemicals and the environmental impact of transport.
In the electronic industry, companies must manage a value chain involving component suppliers (upstream), installation of equipment, distribution to shops and after-sales service (downstream). In the context of ESG, electronics companies must take care of the liable sourcing of natural materials, recycling of utilized equipment and minimising CO2 emissions.
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The value chain in the ESRB, although utilized in a single number, covers a wide scope of activities and relationships at different levels, both upstreamand downstream. Managing the value chain is crucial for sustainable improvement and allows companies to identify and minimize negative impacts on the environment and society. In the context of the ESG, efficient value chain management is essential to achieving long-term success and sustainability, which I want you, dear leaders, .
