The Value Chain, Strategy & Profits: A Top Priority for Today’s Leaders

How would you describe the linkage between your company’s value chain, business strategy and profits?

A Value Chain Map is a tool used to identify, document and analyze the flow of materials and information required to bring a product or service to the customer. Value Chain mapping was first described by Michael Porter in his 1985 best-seller, Competitive Advantage: Creating and Sustaining Superior Performance.  And, organizations who make Value Chain mapping a top priority can reap benefits both short-term and long-term.

Organizations perform many activities in producing a product or service. Some activities add value for the customer, while others don’t add value but may be essential internally or even for legal compliance. A Value Chain map is a diagram of the flow of the specific activities performed across your organization that bring value to your end-customers. It is a tool designed for individual profit centers within an organization, for use in decision-making as leaders look to find ways to increase value provided to end customers.  A value chain map is a powerful tool, that, when analyzed, can help to identify opportunities to create value for customers.  

You can use Michael Porter’s Value Chain map to create, strengthen and improve your differentiation strategy and to add to and evolve it over time. While many companies have mapped their Value Streams to improve efficiency and cost, not as many have modeled their Value Chain and used it as the transformational tool it can be in strategy development and execution. Aligning your value stream strategically — with the (noble) reason your business exists and your competitive differentiation (what you offer that compels customers to buy from you rather than from your competitors) helps your team to continuously develop, evolve and strengthen your competitive advantage. There-in lies its power.

Michael Porter’s books have a place on the top shelf of our library. Re-visiting his chapters can re-center your focus to what’s most important.  The  value your business creates for the customer is the source of business profitability, now and in the future.  It makes sense that focusing on increasing the value you provide to customers will build profits, providing money to reinvest in innovating new and better ways to provide your target customers with more and more value.  Per Porter:  Value created and sold – the cost of creating the value = your profit margin

As logical as this is, our experience shows that many companies spend far more time and energy on improving internal efficiency than on building value and identifying new value-providing opportunities for their customers. As you increase the value you provide to the customer, you increase your profit potential and you build and strengthen your competitive advantage.

Porter’s Value Chain Map enables you to categorize your organization’s activities as either Primary or Support. In his diagram, you see the support activities in yellow at the top i.e. Human Resources. The primary activities are then shown, i.e. Logistics. This helps you to break down the activities performed with a strategic perspective, to identify activities that drive value and cost. The benefit for you and your business is that you can then make high-impact decisions and changes based on information from key process drivers in your business (the support and primary activities on the map).

In summary, the Value Chain Map is a tool that, when used in conjunction with the business strategy, can help managers to build on and strengthen the organization’s competitive differentiation.  It simply makes it easier to identify opportunities to provide greater value to your customers. The value that compels customers to buy from you generates profit potential. By increasing value provided to the customer your company can increase its profits.

When is the last time you evaluated your value chain from the strategic perspective of your company’s competitive differentiation? What information was used? Was it a Value Chain Map? What were the results? Please share your experience, opinions and ideas.

Recommended Reading:

“Competitive Advantage” by Michael Porter

Porter’s Value Chain, Understanding How Value is Created Within Organizations – at http://www.mindtools.com/pages/article/newSTR_66.htm

 

UPDATED:  May 31, 2018

 

 

 

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