Have you ever heard of the terms “supply chain” or “value chain”? If you are an entrepreneur, chances are high that you have heard of them before. You probably might think they mean the same right. Well, there is a distinction and I thought I should clear the air on that before proceeding. Simply put, a value chain is the series of activities or processes that a business or company carries out that culminate in the delivery of a valuable finished product or service.
Universally, there are 5 components of a value chain namely, service, marketing and sales, operations, inbound logistics and outbound logistics. Supply chain denotes the totality of all processes carried out in addressing a customer request. Thus, the supply chain involves aspects such as procurement and logistics amongst other things. The focus of this article, however, is the value chain of your business.
Why Is The Value Chain Of Your Business Important?
The short answer to that question is a two-worded phrase – competitive advantage. For a business or company to have a competitive advantage it is all borne out of understanding and streamlining your value chain. The thrust of any business is to be in a position to offer probably what competitors are offering but at lower prices. Alternatively, it can be to offer a much superior value thus getting room to charge more. Understanding your value chain will enable you to streamline it in ways that will enhance productivity, reduce operating costs and offer superior customer service amongst other things.
Some Of The Key Things To Look At
In order to illustrate or explain my talking points, I am going to use a very simple business example. In using that example I believe you will grasp the points I will be driving at. So I will consider someone who is doing a peanut butter production business. I will explore how that entrepreneur has to go about making sense of the value chain of their business. Some working assumptions to bear in mind are that this is someone who sources peanuts and processes them into peanut butter, packages it into small bottles and sells it. Before I get into that let me briefly highlight something you ought to know – it is vital.
Your Value Chain Approaches Depend On Two Things – Goods Or Services?
Generally, it is very easy for you to get a grip of and eventually streamline the value chain of a goods business. For instance, the peanut butter example I am going to use is a goods business. For a services business, it is very different because services tend to be seasonal and often diversified. Unless you specialize in one particular service (which is not always easy, possible or sustainable) streamlining your value chain is a tall order. So it is important to know that value chains are different when it is a goods business or services business. It is much easier to manipulate the value chain of a goods business and not so much so for a services business.
The value chain is a broad and diverse area so I will not be able to exhaust everything herein. I will only touch on some few areas (just 3) that you must pay attention to in order to understand your value chain. Here are they:
Overall, in operating a business your quest must be to control the source. Supposing a value chain is a hierarchy then the source is the upper end of the value chain. Let us consider the peanut butter example; the question is where that person gets their peanuts (which are the major raw component in this business). Chances are they might be getting them from retailers or oftentimes farmers in most cases. If you are to create a competitive advantage in the business then the crux would be to actually own a farm where you grow the peanuts yourself.
Consider the local example of Fresh In A Box. They started off sourcing farm produce from farmers but decided to, later on, acquire a farm to grow their farm produce themselves. Do you see what is happening there? They understand that controlling the source is the key to business growth. In fact, when you look at businesses that have high margins they most likely will be controlling the source. Obviously being at the upper end of the value chain entails lots of money but it must be something you must aim for if you are to become a brand authority in your line of business.
Remember this is the bottom of the value chain (if you are to consider a value chain as a hierarchy). So in essence that is where the competitors are and it is often crowded. As a business you will usually start off there. This means all the big competitors will be high up at the- and controlling the source. So if you are to create a competitive advantage for yourself you must take time to know the market dynamics, market gaps and also consumer buying habits. In so doing you might discover ways to offer value that establishes you in a market space which is not crowded by competitors.
From the beginning you have seen this aspect recurring numerous times. You must comprehensively know what your competitors are doing otherwise how will you know what to do to outdo them. Understanding your value chain is meant to lead you to a place where you have a competitive advantage. So you must study your competitors and decide on which areas you are going to target with the intention of outdoing your competition.
So in a nutshell there are two key takeaways in understanding your value chain. One is to appreciate that you must strive to get to- or to control the source in order to attain market dominance. The second is that you must understand your competitors enough to know how you can have a competitive advantage over them.