Value chains can be analyzed to recognize the added value of the chain in a business. Understand how the value chain works and apply it to your company’s operations. We will also introduce in detail how to utilize the value chain and examples.
What is value chain?
A value chain is a concept that considers the connections between all of a company’s business activities as a chain of value. This is a concept advocated by American management scholar Michael E. Porter in his 1985 book “Strategies for Competitive Advantage”.
Understanding the structure of the value chain, where added value is created in each activity and leads to profits, can provide clues for exploring business strategies.
Difference between value chain and supply chain
Value chain is an analysis that focuses on value, “what kind of added value” is added to goods and services. On the other hand, the supply chain expresses the flow of how goods and services are supplied to customers, and is effective in understanding the overall balance.
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What is value chain analysis?
Value chain analysis
refers to a framework for internally analyzing the value of a business. Through analysis, you can pinpoint “your company’s strengths and weaknesses compared to your competitors” or “which activities are creating added value or not.” Furthermore, it is possible to embody the following business strategies.
・Understand the cost of each activity and use it for cost reduction (cost strategy)
・Understand your company’s strengths and weaknesses and use them for differentiation strategies
Value chain components
To perform value chain analysis, first let’s confirm the components of the value chain. The model below is not a fixed pattern, but please take a look at it as an example. The actual contents may differ slightly depending on the business and type of business.
5 main activities
When analyzing a value chain, there are activities that are the main activities of a company or business entity. Taking manufacturing-related as an example, it is defined as a chain of five main activities: “procurement,” “manufacturing,” “logistics,” “sales,” and “introduction.” In other words, it is a structural diagram that positions the processes required for a product to generate profits from a contact chain.
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Four support activities
In order to operate our main activities, we need a corporate infrastructure divided into four areas: “General management operations,” “Human resources,” “Technology development,” and “Procurement.” It can be said to be an essential gear for operating the ecosystem of main activities.
How to proceed with value chain analysis
1. Identifying your own value chain
2. Cost analysis
3. Analysis of strengths and weaknesses
4. VRIO analysis
Performing value chain analysis in stages makes it easier to build a comprehensive strategy. Here we will introduce four steps on how to proceed with value chain analysis.
Identifying your own value chain
First, list all activities related to the target business and categorize them by function. At this time, it is important to distinguish between the main activities of the business and the support activities. Visual recognition makes comparisons easier, so it may be effective to summarize them in a table or diagram.
cost analysis
Let’s make a list of the costs incurred for each activity. When calculating costs, be careful about what criteria you use to calculate costs. We will clarify the numbers by time, period, manufacturer, plan, etc. in order to eliminate wasteful income and expenditure and increase profitability.
Analysis of strengths and weaknesses
When it comes to understanding the strengths and weaknesses of each activity, gathering many opinions within the company increases certainty. Soliciting opinions from people other than those directly in charge may lead to discovering value from a broader perspective.
VRIO analysis
At the final stage of value chain analysis, we analyze the potential for effective use of an organization’s internal resources. Specifically, we use a method called
VRIO analysis
, which evaluates Value, Rarity, Imitability, and Organization by selecting Yes or No or by scoring them. I’m going.
Examples of value chain usage
We will introduce examples of companies that utilize value chains for marketing.
Tokyo Electric Power Company Holdings
Tokyo Electric Power Company Holdings has a corporate strategy that contributes to the SDGs by building clean energy and increasing the efficiency of energy consumption toward 2050. We are also focusing on supporting hydropower and wind power projects in Japan and overseas by leveraging the technology and know-how we have cultivated over the years. It can be said that the strength of TEPCO’s value chain lies in its corporate governance, which allows group companies to not only improve their capabilities in specialized fields, but also to engage in reforms with a consistent concept.
fuel procurement
Japan, which is poor in fuel sources, is 60% dependent on imports of LNG (liquefied natural gas) and other gases, 20% on coal, only 3% on hydropower, and less than 10% on renewable energy including biomass recycled electricity. As a result, we are facing problems in procuring fuel.
power generation
Therefore, the company focused on developing infrastructure for the Green Power Platform, which promotes sales of renewable energy in addition to wind, water, and solar power for power generation. A seamless operational system has been established in the renewable energy value chain, ranging from CO2 reduction estimation institutions run by TEPCO group companies to power transmission network maintenance and sales methods.
Power transmission/distribution/sales
Although power competition has been intensifying since the liberalization of electricity was lifted in 2016, efforts are being made to preserve the surplus power of households, distribute power using 100% hydropower for the first time in Japan, and add to the environment by issuing “green power certificates”. We aim to differentiate ourselves from our competitors by segmenting our sales methods, such as dealing with valuable renewable energy.
Ajinomoto Co., Inc.
Ajinomoto Co., Ltd. uses unique perspectives such as sensitivity engineering, observational costs, and psychology to earn high evaluations at all contact points: KITCHEN, TABLE, EARTH, and STORE. Through repeated research, we continue to develop products that pursue customer satisfaction, which we have named the “Kitchen Value Chain.”
The company has its own research and development institute and contributes to the sustainability of people, living things and the planet by excelling in the field of aminoscience. The company has so far acquired more than 4,000 patents in Japan and overseas, and has research bases in 14 countries around the world and has been working on proposing global solutions.
Ajinomoto Co., Inc., through support activities with its business divisions, production divisions, and specialized laboratories, focuses on the sensory evaluation of customers who perceive deliciousness, and improves evaluation technology backed by facts as well as commitment to raw materials and food safety. We are realizing this.
Fast Retailing Co., Ltd. (UNIQLO)
UNIQLO’s value proposition is to provide high-quality, low-priced basic casual clothing that can be coordinated with any outfit for anyone. In order to realize this value, we have adopted a system of vertical integration (manufacturing and retailing) in which each activity is consistently controlled in-house. This is an example of a successful business model that provides long-term value through stable collaboration with factories and overseas partner companies.
Product planning and development
UNIQLO is characterized by its product development, which goes beyond just passing trends such as the development of highly functional materials and good design; it also develops products that address the subconscious needs of its customers. For this reason, we take time to incorporate our plans into products, and continue to develop colors and elasticity even after sales begin.
Manufacturing (material development/production)
UNIQLO does not have its own manufacturing factory, but outsources sewing to partner factories. Many of our factories are located in China, and we receive thorough technical guidance from Japanese experts and employees called “takumi.” We perform quality control for all processes involved in product production.
Inbound logistics
Products produced at overseas factories are managed at warehouses in Japan. From each warehouse, products are delivered to stores by affiliated transportation companies.
store development
Traditionally, UNIQLO’s stores were mainly roadside stores with an area of about 1,000 square meters, but as they develop new customer bases, they are moving to larger stores. Since 2008, UNIQLO has closed 45 stores but opened 55 new large stores, improving the rent ratio effect.
Store management
Uniqlo’s sales motto is “Help Yourself.” By adopting a customer lead policy that only guides customers when they need it, we are able to operate our stores efficiently.
Marketing/Sales
Uniqlo has taken the initiative in using television commercials to market new products. We are also focusing on communicating our company philosophy, which emphasizes our innovativeness: that stable, basic clothing has value as a component rather than as a unique item.
Human resources management
UNIQLO uses a performance-rewarding model that establishes positioning for each section. If you are appointed as a Superstar Store Manager, you will be in a position to manage inventory budgets and have the opportunity to maximize your abilities as a merchant.
General management
UNIQLO strives to reduce unnecessary costs in order to provide cost-effective products. We advocate “Global One,” which means implementing plans that are considered the best throughout the world, and our philosophy is “Everyone’s Management,” in which all employees achieve results by putting management into practice.
Summary: Use the value chain to your advantage! Initiatives that can be utilized to provide value
By understanding the structure of the value chain and identifying each section of the business, you can review the value. The companies featured in our success stories have a consistent philosophy that ensures that the entire company recognizes its contribution to the value chain.
In order to make effective use of value chain analysis, it is also important to make efforts to provide value throughout the business. If you want to know more about the value chain or want to utilize it in your own company, please consult with an expert.