Do You Conduct Value Chain Analysis? (Part A)

To better understand the activities through which a firm develops a competitive advantage and creates shareholder value, it is useful to separate the business system into a series of value-generating activities referred to as the Value Chain and then to analyse these activities by conducting value chain analysis.  The Value Chain is shown in the diagram below:

Value Chain Analysis is a process that allows firms to understand the parts of the firm that create value and those that do not.  Understanding this phenomenon is important as you will only make money if you are creating value that brings forth more income than the money that you are spending.  It is very easy for cash flows to deceive a business owner leading them to think that they are progressing when they are actually bleeding out in some areas.   Let us take a look at Value Chain Analysis in the context of our beloved Zimbabwe.  I will briefly explain a term first and then analyse it in the Zimbabwean context.  In this article I am just going to skim over the surface otherwise there is a lot more to Value Chain Analysis than what I shall reveal.  I would want you to decide whether or not this type of analysis is being conducted effectively in Zimbabwe and by which companies?

In Part A of this article we will discuss the primary activities of the Value Chain.  In Part B we will take a look at the support activities.  As you read through I want you to ask yourself the following questions: 1) Are you conducting Value Chain Analysis completely (going through all the stages) and as a deliberate exercise or you just stumble upon it? 2) Are you conducting Value Chain Analysis proactively in order to stop revenue leakage before it occurs and to identify opportunities for growth or you are taking a reactionary stance thereby losing income?

Primary Activities:  These activities directly deal with the creation of products and services.

Inbound Logistics:  This is the receiving and warehousing of raw materials or products, and their distribution to manufacturing or customers as they are required.

I have a side gig, I am into multi level marketing because I am a Marketer and there is good money in that industry.  In Zimbabwe examples of multi level marketing firms are Avon, Tiens (Tianshi) and Forever Living among others.  I went to a warehouse in Msasa to collect my stock for resale.  The first days after I had signed up the service was slow because there was only one person to serve us yet there were many customers.  This was bad and I considered quitting at some point.  However, as time went by the service improved as more people were hired to help with the growing numbers and suddenly we were all happy.  This is what happens when Value Chain Analysis is being conducted.  If it happened deliberately it means that someone was analysing that touch point and upon realising that it was adding value to the organisation, decided to invest more in it so as to maintain or increase that value.  The result is more income for the company involved.  Whether that was happening consciously or not is a story for another day.  What you should know is that you should do it.

Operations: The process of transforming inputs into finished products and services.

At my day job we have a canteen that is operated by Servcor.  We always had issues with them about the quality of their food.  The food tastes worse than my own cooking.  Imagine, a catering company that makes food that is worse than what a bachelor makes.  The canteen is infested with flies at times and the cooks are not friendly.  When you leave the canteen someone can tell that you are coming from the canteen because of the ‘canteen smell’ that you carry with you.  As a result of this and other issues business has slowed down drastically to the point where one or two people can be found in the canteen.  Unfortunately this led to some of the cooks being laid off and it is said that they are going to be reinstated if and when business picks up.  This is another example of were Value Chain Analysis is being conducted to some extent.  They realised that the value that they were getting from our canteen had gone down and as such they cut on their staff costs.  Are you doing this as well or there are contact points at which you are bleeding simply because you are not checking and making the necessary adjustments?

Outbound Logistics: The warehousing and distribution of finished goods.

I visit my rural home in Mhondoro and I like going to the growth point.  We have fun there we usually have a braai and I get to meet some of my relatives and adopted friends from the rural areas i.e. adopted as in we are only friends when I am there.  Anyway I always used to notice that the soft drinks that were sold in one of the stores were always flat when I drank them.  By flat I mean that the soft drinks would have lost that fizz.  It makes them taste kind of awkward.  I asked my friend who works at Delta about it when I went home and he told me that a soft drink becomes flat when it stays on the shelf for too long.  This probably meant that the store was not pushing a lot of sales.  So I tried to figure out why Delta would send a truck all the way to the Mhondoro area if sales were not that high.  Recently when I went back to the growth point the refrigerator only had water in it.  I asked what had happened to the soft drinks and I was told that they were no longer being supplied.  The attendant was not being clear but I got the idea that they had been cut off by the supplier.  Value Chain Analysis was indeed conducted here and Delta (I would assume) had probably reached the conclusion that the channel was not worth pursuing.

Marketing and Sales: The identification of customer needs and the generation of sales.

I have a friend of mine who is a salesman.   He travels using a company vehicle.  He tells me that he is only allowed to use the vehicle for work related activities and he leaves it at work when he goes home.  However he runs a lot of his own personal errands using that vehicle.  When I ask him how he manages to do that he tells me that no one really monitors him.  The vehicle has no tracking system and as long as he does not run out of fuel he will be fine.  If he does run out of fuel he simply adds his own as it is to his own advantage.  The problem I would have if I was the owner of the business is that my assets would lose value at a faster rate owing to wear and tear.  It is also evident that Value Chain Analysis is not being conducted in this firm.  If this was the case someone would be tracking these vehicles to ensure that they are providing a worthwhile return on investment.  Maybe these cars actually cost more to run than they are worth?  Maybe there are alternative ways of conducting marketing and sales that are cheaper yet more effective?  In this case maybe your vehicles are being used to conduct none core business?  I am sure if I were to ask his manager the average cost per sales call per vehicle he would not be able to answer that question.  These are just symptoms of a bigger problem that will be lying underneath.

Service:   The support of customers after the products and services are sold to them.

Value Chain Analysis is easy to conduct in scenarios where everything is crystal clear.  In situations were a little more in depth analysis is required things can get tricky.  I like Multichoice and because of that I have a Multichoice decoder.   DSTV has many channels even though most of them are not interesting (well, to me).  I like to watch soccer, movies and series, especially comedy.  They make me feel good after a long day at work as I can just kick back and relax.  I do not subscribe to DSTV in Zimbabwe though because it is very expensive.  I do however, like calling up their Zimbabwe call center on (04) 32600 so I can hear the lady with the sweet voice saying ‘Welcome to the Multichoice Zimbabwe contact center’.  I call them to ask various questions about my ‘foreign’ account.  Believe me when I say that I go on and on when I am on the phone.  I also like visiting their shops to talk to my friends.  I wait in the queue, get to the counter and then just blab with them about non core business.  To Multichoice it might not seem like an issue because they are making tons of money and it is easy to relax when that is the case.  It does however represent revenue leakage and I wonder what their shareholders would think about that.  I would be tempted to think that Value Chain Analysis is not being conducted here because they are definitely not checking to see whether or not they are making the most of their agents.  Not checking on the value that they are getting from the agents might mean that they are not checking on the touch points as a whole.  That being the case I will not stop going there to have some small talk when I am in town and I am feeling bored.

Analysing your Value Chain is very important as you can ensure that you make the most out of your investment.  The activity shows you where to invest and where not to invest.  It stops you from losing money before you lose it and shows you where you should channel more of your limited resources.  As they say every dollar saved and every dollar made contributes to the bottom line.  You will be shocked at how different your figures would look if you conducted this exercise, especially with the help of an expert.  If this exercise is not being conducted in your firm then I suggest you demand it.  If you do not see a positive change in your figures after you conduct the exercise then contact me.  Let me know what you think about this issue in the comments section below.

Thanks

Ruvimbo