A discussion of the concept of “value chain,” which will be familiar to anyone involved in the construction of management and business strategies in companies.
You need to think carefully in order to discover your company’s strengths and weaknesses, reduce costs, and rebuild your company’s structure even a little.
Here we have explained the concept of “value chain,” which holds the key to gaining an advantage in competition with competitors.
What is value chain? Concept proposed by Michael Porter
The value chain is one of the business frameworks proposed by
Michael Porter
in his book “Competitive Advantage Strategies: How to Sustain High Performance.”
So who is Michael Porter, and in what situations is the value chain
framework
used? I have summarized it below.
- Who is Michael Porter?
- What is value chain?
- Difference with supply chain
- Conceptual diagram of value chain
- The case of Starbucks is often featured in value chain explanations.
Who is Michael Porter?
Michael Porter is an American management scholar. He holds a doctorate in economics and is a professor at Harvard University’s Graduate School of Business.
He is considered a leading authority on research on the construction of corporate strategies and competition with competitors, and is also known as a proponent of
five forces analysis
in addition to value chain analysis.
What is value chain?
Value chain means “value = value” + “chain = chain” = “value chain,” and it is the idea of “linking individually generated values.”
We link the “added value” of each process of a company’s business activities, as well as each individual process, and treat it as a “series of flows = chain (whole)”.
Why do we need to chain value?
The added value of each step, process, and individual product is often easily imitated by competitors.
However, as a series of steps, if you can provide “added value as a whole” that is intricately intertwined with your main products and services, it will be difficult for your competitors to imitate it easily.
As a result, this will transform into your company’s unique originality and strengths.
Value is also familiar at McDonald’s
By the way, many people have probably heard of “Value,” which is even used as a product name at McDonald’s.
McDonald’s has developed “Value Sets” and “Value Lunch” that add one or two items to McDonald’s main product, hamburgers, and positions side menus as “added value” to make hamburgers even more delicious.
Difference with supply chain
When considering the value chain, we must also consider the supply chain.
“Supply” means “supply” and “supply”, and “supply chain” means “supply chain”.
It refers to the so-called “chain of goods,” from the procurement of raw materials to the manufacturing of parts, and the transportation and sale of finished products.
While value chains focus on the chain of value, supply chains focus on the flow of goods.
Conceptual diagram of value chain
In order to analyze the added value of each step or process using the value chain framework, it is necessary to divide your company’s business activities into “main activities” and “support activities.” there is.
- Main activity
- Support activities
Main activity
Main activities refer to direct activities for manufacturing and selling products and services handled by the company.
It is the main activity of business activities, from so-called planning and planning to procurement of raw materials, manufacturing, transportation, and sales.
Support activities
On the other hand, support activities refer to indirect activities that support the main activity. These activities will be carried out in departments that are responsible for supporting main activities, such as general affairs, labor affairs, human resources, accounting, and technology development.
The case of Starbucks is often featured in value chain explanations.
Starbucks is often cited as an example of value chain explanations.
Starbucks is one company that was able to make great strides by embracing value chains and clarifying its strengths. Its strengths are as follows.
- Providing high quality coffee
- Customer service without a customer service manual
- Provide a comfortable space
Providing high quality coffee
Although the price of Starbucks coffee is a little higher than that of other companies in the same industry, its business performance is increasing.
This is because we have a strong commitment to using high-quality coffee beans and providing our customers with delicious coffee, just like our competitors.
- Uses high quality coffee beans
- Nestlé (Switzerland), said to be the world’s largest food company, is also paying attention.
Uses high quality coffee beans
Starbucks has its own procurement route for coffee beans, and strives every day to purchase high-quality coffee beans from suppliers around the world.
They seem to be particular about purchasing only Arabica coffee beans, which have harsh cultivation conditions, are susceptible to diseases, and are difficult to manage.
These commitments, policies, and company strengths have created passionate fans and repeat customers at Starbucks.
Nestlé (Switzerland), said to be the world’s largest food company, also took note
<br/> Nestlé (Switzerland), said to be the world’s largest food company, focused on Starbucks’ strength in its ability to purchase high-quality coffee beans. .
Nestlé (Switzerland), in an effort to make further advances in its mainstay coffee field, turned its attention to Starbucks’ outstanding ability to purchase coffee beans.
In 2018, it was reported that the company had reached an agreement with Starbucks for approximately 790 billion yen to acquire the rights to sell high-quality coffee beans.
In this way, your company’s strengths may be recognized by other companies.
Customer service without a customer service manual
Starbucks does not have a “customer service manual” that chain restaurants usually have.
This is because one of Starbucks’ management policies is the pursuit of “hospitality = hospitality and consideration.”
Rather than tying employees to manuals and suppressing their individuality, we want to encourage them to serve customers with hospitality that brings out each employee’s individuality and personality without being bound by manuals. .
This can be seen from the policies below.
OUR MISSION
To make people’s hearts rich and vibrant-
From one customer, one cup of coffee, and one community
Reference:
Starbucks Coffee Japan Co., Ltd. “Our Mission and Values”
Our mission is to enrich our customers with every cup of coffee and every community.
This management policy is also part of Starbucks’ value chain.
Provide a comfortable space
Based on our management policy that in order to enjoy delicious coffee to the fullest, it is important to have a place where you can enjoy it, so Starbucks is very particular about the space we provide.
The carefully designed space has become popular with customers as a comfortable place, and before we know it, the image of “working elegantly with a laptop spread out at Starbucks” has become established.
The added value of “high-quality coffee” and “a comfortable space” is connected, making it a true value chain concept.
Value chain analysis and objectives
We have explained above that a value chain is a chain of value. Below, we will explain what we can learn by analyzing the value chain and its purpose.
What is value chain analysis?
Value chain analysis
is the process of considering and analyzing each phase of a company’s business activities. We will find added value in each phase.
Purpose of value chain analysis
The purpose of value chain analysis is to understand your company’s strengths and weaknesses, and to understand in what phase of your business activities added value is being created.
By understanding and grasping these, you can review the allocation of management resources and realize cost reductions. You can also learn about the added value your competitors are offering.
- Understanding the added value of your company
- Understand your company’s strengths and weaknesses
- Know your competitors’ added value
- Achieve cost savings
Understanding the added value of your company
In the value chain, by separating each step and each process and verifying each phase as a separate phase, it becomes possible to understand at which point added value is occurring.
By linking these individually existing added values, we make them function as a value chain.
Understand your company’s strengths and weaknesses
If you can discover the individual added value mentioned above, you will be able to understand your company’s strengths and weaknesses.
If you can confirm that added value is being created in a certain phase, you can judge that this is your company’s strength.
Also, if you can determine that your company has added value that your competitors are able to achieve, but you cannot, you can determine that this is a weakness.
Know your competitors’ added value
As mentioned above, knowing the added value that exists in your competitors is very important in finding your company’s weaknesses. An effective way to do this is to perform value chain analysis on your competitors as well.
We will analyze in what phase competitors’ added value occurs and what kind of business activities they conduct to obtain that added value.
Achieve cost savings
Once you understand your company’s strengths and weaknesses, you will be able to see where you should focus your efforts, and you will be able to reduce costs.
We will review costs in areas where we have already established strengths and redeploy management resources in phases where added value is not being created.
Value chain analysis method
Value chain analysis mainly involves the following four items.
- Diagramming the value chain
- Clarify costs for each phase of business activities
- Understand your company’s strengths and weaknesses
-
Evaluate your company’s management resources with
VRIO analysis
Diagramming the value chain
By creating a diagram of your value chain, you can visualize your company’s business activities and make it easier to understand the details of your activities.
As a result, you will be able to clarify the work that your company is missing and the added value that is not being generated, and you will be able to identify the activities that should be carried out in the future.
In order to visualize it, you need to break down all of your company’s business activities and write them down.
When writing out each item, refer to the diagram listed in the “Value Chain Conceptual Diagram” section above.
For example, if it is a “main activity”, it will be as follows.
■Main activity subdivision example
|
purchasing logistics |
|
| Purchasing raw materials | Through our own steady sales activities, we have succeeded in building relationships of trust with multiple affiliated companies. Stable procurement of raw materials has become possible. |
| Transportation of raw materials | We have been able to secure a delivery company that can quickly deliver the product. |
|
manufacturing |
|
| Manufacture of products | Highly productive line work with custom-made manufacturing machines running at full capacity. The number of human resources can be kept to a minimum, making it possible to significantly reduce human resources costs. |
| Manufacturing process and quality control | A high level of on-site management is now possible thanks to the custom-made manufacturing machine and the AI-equipped manufacturing process and quality control system that was ordered at the same time. |
|
shipping logistics |
|
| Delivery/Transportation | The lead time was significantly reduced because the transportation company we had a long-standing relationship with decided to increase the number of flights. |
|
Sales/Marketing |
|
| sale | Through our own steady sales activities, we have succeeded in building relationships of trust with multiple affiliated companies. The company has established its own sales route. |
| marketing | Because the partner company regularly advertises in stores, we have succeeded in lowering advertising costs. |
|
After-sales service |
|
| customer support | We have built a strong support system for purchasing customers using our own manuals that we devised in-house. The spirit of hospitality paid off. Regarding customer service before purchase, we introduced an AI-equipped chatbot system and succeeded in streamlining the process. |
Clarify costs for each phase of business activities
Once you have subdivided your company’s business activities and written them down by phase, the next step is to write down the companies you request each task from and record their costs.
When calculating costs, try to use the same fiscal year, such as quarterly, half-yearly, or one-yearly.
|
purchasing logistics |
|
| Trading companies | Cost (million yen)/year |
| A Shoji Co., Ltd. | 〇〇 yen |
| B Shoji Co., Ltd. | □□ Yen |
| C Transportation Co., Ltd. | △△yen |
|
manufacturing |
|
| Trading companies | Cost (million yen)/year |
| A Kogyo Co., Ltd. | △△yen |
| B Manufacturing Co., Ltd. | 〇〇 yen |
|
shipping logistics |
|
| Trading companies | Cost (million yen)/year |
| D Delivery Service Co., Ltd. | □□ Yen |
|
sale |
|
| Trading companies | Cost (million yen)/year |
| Store A | □□ Yen |
| Store B | 〇〇 yen |
|
After-sales service |
|
| Content | Cost (million yen)/year |
| Chatbot rental fee | △△yen |
| Operator outsourcing costs | 〇〇 yen |
By visualizing costs in this way, it becomes clear where waste occurs and in what phase you should try to reduce costs.
Understand your company’s strengths and weaknesses
A company’s strengths are its business activities that generate added value.
A company’s weaknesses are issues, problems, and areas for improvement that are not being created where added value should be created.
A good way to understand these things is to look at what has been achieved and what has not been achieved in each phase and compare it with your competitors.
For example, we will make a comprehensive list down to the smallest detail, such as helpful functions that come with other companies’ products that cannot be imitated or realized by our company.
By analyzing your business in this way, you will be able to clarify what your company can and cannot do.
Evaluate your company’s management resources with VRIO analysis
We perform VRIO analysis on the identified strengths and evaluate management resources.
VRIO analysis is one of the business frameworks for evaluating management resources. It is used to know the current status of your company’s management resources and to compare its advantages with competitors.
You can evaluate your company’s management resources from the following four items.
- Economic value: Value
- Rarity: Rareness
- Imitability: Imitability
- Organization: Organization
Economic value: Value
“Economic value” evaluates whether a company’s management resources can adapt to the macro environment.
You can determine whether you have a competitive advantage or a competitive disadvantage by evaluating your management resources, such as whether you can adapt to external threats and whether you can have an impact on society.
Rarity: Rareness
“Rareness” evaluates whether a company’s management resources are unique.
If you can find originality that is unique to your company and not found in your competitors, there is a high possibility that that rarity will become your company’s strength and give you an advantage in market share.
Imitability: Imitability
“Imitability” evaluates whether there is a possibility that competitors can imitate your company’s management resources.
It can be difficult to gain a market share advantage with products and services that can be easily imitated by competitors.
On the other hand, if you can establish a system that your competitors cannot imitate, you will be able to take advantage of your company’s management resources, making it more difficult for your competitors to imitate it.
Organization: Organization
“Organization” evaluates whether a company is making full use of its management resources.
The focus is on whether a so-called “solid organizational structure” has been established, from the internal structure of the organization to work flow, utilization of human resources, welfare benefits, and compliance.
By making full use of these management resources, we can maintain a competitive advantage.
summary
“Value chain” means value chain. By knowing your company’s strengths and weaknesses and linking the added value of each phase, you will connect it to the final profit (margin).
This can be said to be a very important strategy for reconsidering your company’s business model and rebuilding your management structure.