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The Business of Value Chain Published: Sunday, March 8, 2009 By: Dr. Manuel Ángel (Coco) Morales

A useful concept and tool for assessing competencies and analyzing business units within organizations is that of the VALUE CHAIN.  It describes the business or the organization in terms of the activities that have been chosen to undertake in order to be able to compete.  These activities are the basis for examining the opportunities for reducing costs or adding value (IMPROVING DIFFERENTIATION) at each stage of this value chain.

These days, all organizations should examine their value chain.  First, they can go by assessing their drivers of cost, and second by looking at value added.  HOWEVER, ULTIMATELY COST AND VALUE MUST BE INTEGRATED INTO AN UNDERSTANDING OF THE COMPLETE CHAIN.  WHEN THIS IS NOT THE CASE ORGANIZATIONS RUN THE RISK OF ATTEMPTING TO REDUCE COSTS, BY ELIMINATING OR SUBOPTIMIZING ACTIVITIES CRITICAL TO THE ADDING VALUE FOR CUSTOMERS.

The value chain provides a better understanding of the magnitude of the cost variability and most of all an organizational design framework for addressing the reasons why these costs differ from time to time, and among different organizations.  This information is essential to fully understand the organization’s competitive position.  Thus, when developing a value chain, it is important to decide what level of detail to use.  The more of details the more of complexities, but the more profound knowledge to make better decisions.  Again, it is important to decide which costs are really relevant.  Sometimes costs are fixed and variable, including capital costs via depreciation, measured in terms of annual costs divided by annual volume.  Also, competitors in the same industry, may use different value chain, depending on their outsourcing decisions, AND MOST OF ALL, THEIR REAL CORE COMPETENCES. In a highly competitive environment there is constant, unrelenting pressures for cost reductions, as well as innovation.  The challenge is to understand with profoundness the drivers not only of cost but OF VALUE ENHANCEMENT AND TWO OF THE MAJOR DRIVERS OF LONG-TERM COSTS ARE ECONOMIES OF SCALE AND LEARNING.  Both need be understood dynamically.  Economies of scale are influenced by technological change and the relative importance of fixed and variable costs.  If all costs are variable then economies of scale are absent!   If scale is becoming more important, the industry and the organizations in it are likely to face restructuring through mergers, acquisitions, and even through strategic alliances and partnerships.  Organizations unaware of this will end as acquisition targets.  Those aware will enjoy the competitive advantage as a result of those changes.

Learning is a fundamental component, while analyzing the value chain.  Learning effects can be particularly dramatic in high-growth markets, while significant cost reductions occurring as the volume increases.  One interesting and not conventional strategy is to identify a growth potential and develop coherent courses of action to achieve long-term profit.  Something to be alert is that competitors with inferior cost position, may introduce a major innovation, revolutionizing industry cost structures, and thus nullifying the leaders advantage. 

Finally, it is always vital to ponder where and how to add value to customers, acknowledging that customer value is the difference between the perceive benefits received from the product-service-human capital and the perceived cost increased in securing those benefits. 

 


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