Value Chain Analysis is an economic theory that has been around for more than half a century and was first published in 1937 by the German-American scholar W. Edwards Deming. According to this concept, a company’s value can be measured not only by how much a product sells for, but also by how many of its components are required to produce that product. The more elements a commodity needs to create the more valuable it is. Thus a commodity is said to be valuable when the supply of raw materials or processes required to create that commodity is greater than the cost of production. Value chains allow companies to follow production costs and still make a profit because they are always updating and improving their methods.
A value chain is simply a sequence of events that a company performing in a certain industry follows in order to provide a product to the marketplace. The basic premise of value chain analyses is that there is an economy of scale in which a company that uses most of the elements necessary to create the final product receives a discounted price from suppliers of raw material and labor. In this economic arrangement buyers of raw material or labor pay a company for both elements at one time. This discounted price is what the company uses to buy its final product.
Analyzing the Value Chain Analysis For any business, it is necessary to understand why their competitors’ prices are low and why their own prices are high. It may be difficult for a company to identify their competitors’ low prices, but it is important to understand why they are so low. Competitive behavior is often a driving force behind changing internal practices and product pricing. Companies who are able to identify competitive threats early can build a base of knowledge that will allow them to quickly respond to those threats and increase their competitive advantage. This analysis helps to determine what actions to take that will add value to the company while decreasing the competitors’ competitive advantage.
A third area that is examined in a value chain analysis is the relationships among the Lakshmi. Lakhmi refers to Hindu deities that were associates of the earlier kings. The Lakshmi often took on human form and helped to shape the decision making process of a society. Extracting the information from these relationships is necessary to create a comprehensive representation of the relationships among the stakeholders in the value chain.
The process of translating the Lakshmi into a clear idea of the relationship among the stakeholders is essential to create a framework for understanding. In many cases, it is very difficult to isolate one single element for a given company. Often, a combination of many different attributes make up a clear idea of the primary drivers behind a company’s competitive advantage. Therefore, a good value chain analysis must consider all of the primary drivers.
The next stage of Value Chain Analysis is to create value by adding value to the company by creating value through innovation. Often companies will be innovating in one or two areas to create competitive advantage. In the case of innovations in processes, technology, or process, there are several drivers behind those innovations. However, creating value only by adding value to the organization can be a tricky proposition. Often, the true value created will be much less than the value added. It is important to weigh the return on investment (ROI) of the innovations to determine whether the venture is worth the effort.
There are also two primary types of drivers that are examined in a value chain analysis. These types are primary drivers and secondary drivers. Each driver provides a unique opportunity for enhancing business operations. For example, a primary driver may be extracting value from an existing process, technology, or process.
A secondary driver may be identifying a new process, technology, or process that can be utilized to improve overall operational efficiency. Finally, a third driver is extracting value from the interaction of the primary and secondary sources of organizational value. This type of analysis is often used in conjunction with the value chain model to generate new strategies and solutions to organizational problems. The value chain model identified in this analysis is then used by the various business functions to create and implement strategies to address problems. Value creation is not the sole basis for the success of any enterprise, but it is one of the key drivers of sustainable growth in any business.
