Strategy — map it out yourself
Do You Evaluate Your Value Chain Properly?
How much do your activities cost?
Some years ago, I worked with two companies. One was a pretty old-fashioned manufacturing company, and another firm was an online store.
It was the time of the economic downturn, so both companies tried to find a way to save some money without sacrificing the quality of their products and services. And the latter managed to do it much more successfully than the former.
They had distinct business models, teams, and cultures. And one of the key differences between them was their attitudes toward their value chains. And it determined the success of their effort of cost reduction.
Whether your business is small or large, you need to pay attention to your value chain and its cost.
Value chain
If you ask a top executive to visualize how her enterprise functions, she will most likely draw its organizational structure. But it can tell us who reports to whom — and nothing more.
An organizational chart fails to represent two major issues that are crucial for any company:
- Any organization is rather a set of processes than a hierarchy. And the efficiency of the processes determines the quality of the end product.
- Any company may earn profit only by identifying and satisfying its customers’ needs. To do so, it needs to create value for them.
Any company is a set of activities that deliver or help deliver customer value. You can see an example of the simplified value chain in the picture below:
Therefore, we can look at any organization as a mechanism using its assets to convert raw materials and/or information into customer value.
– A processing plant buys raw materials and turns them into products it sells to B2B customers.
– A bookstore chain buys books in bulk and turns them into customer experience, an ability to dive into the magical world of words.
– A social media platform employs user-generated content to build an environment where users can read, watch, exchange messages, boast, compare themselves with others, etc.
Any firm, from Procter&Gamble and Alphabet to a small corner store or a nameless roadside cafe, works in this fashion. Any company is a value chain.
Value chain evaluation
If any company is a value chain, it seems logical to evaluate its every activity from two points of view:
– How much does an activity contribute to value creation?
– How much does it cost?
But the manufacturing company’s P&L statement looked like a conventional financial sheet form where expenditures were combined into groups on the principle of equivalence. So, if you would like to learn, for instance, how much the company paid for customer logistics, you couldn’t do it. The relevant costs were scattered across different budget lines.
When a customer placed an order with the factory, many different departments took part in its fulfillment — from sales to logistics.
One could easily find how much the company spent on each department in the financial reports. But there was no information in these documents about the cost of the order fulfillment process.
The online store built its financial reports on unit economics laws. So, executives knew exactly how much the company paid for:
– One customer acquisition
– Average order processing
– Order delivery
– Etc.
Their financial documents helped managers make data-driven decisions. They could see the cost of each activity and compare it with the value it created.
Conclusion
If you run a company or only think about it, try to envision it as a value chain, a range of processes, and not just an org chart. Outline a flowchart of the major processes.
Rank processes according to their contribution to customer value.
Try to evaluate the cost of each primary process.
Compare the processes’ cost with the value they create.
Could you increase investment in some of them to create more customer value?
Could you save some money to reduce the cost of the processes that don’t influence customer value much?
Do you like the story? Support my work by becoming a Medium member.
Subscribe to my free weekly newsletter here. Follow me on Twitter.
