Friday, 25 June 2021

African Businesses need to Master Value Chains before dominating Supply Chains

African small businesses must master their value chain, before they dominate the supply chain for their respective industries. The value chain is a process in which a company adds value to its raw materials to produce products eventually sold to consumers. The supply chain represents all the steps required to get the product to the customer.

 

The Value Chain concept was developed and popularized in 1985 by Michael Porter, in “Competitive Advantage,” a seminal work on the implementation of competitive strategy to achieve superior business performance. Porter defined value as the amount buyers are willing to pay for what a firm provides, and he conceived the “value chain” as the combination of nine generic value-added activities operating within a firm – activities that work together to provide value to customers. 

 

Porter linked up the value chains between firms to form what he called a Value System; however, in the present era of greater outsourcing and collaboration the linkage between multiple firms’ value creating processes has more commonly become called the “value chain.” As this name implies, the primary focus in value chains is on the benefits that accrue to customers, the interdependent processes that generate value, and the resulting demand and funds flows that are created. Effective value chains generate profits.

 

There are three key values that a business owner must assess of their business - technical, organisational, and personal value. 

 

Technological value is the intrinsic value of the resources provided, which occurs in almost all exchanges. For those who are thirsty, regardless of the source or any other considerations, water has technical value. The cup can be used, even if it is dirty, the person who provides it is the criminal, and the water still has the same technical value.

 

Organizational value is based on the context of the exchange and can be derived from a variety of factors, such as moral standards, prestige, credibility, and association. Brand image can generate organizational value, as well as a company's reputation. In high-end restaurants, the value generated by the label on the water bottle is much greater than the content in the bottle.

 

Personal value comes from the personal experience and relationships involved in sharing resources and the benefits provided. Although technical and organizational value is accumulated by companies participating in business exchanges, personal value is accumulated by individuals.

 

It is important to know this, and best way is to conduct a Value Chain Analysis.

 

Value chain analysis is the process of looking at the activities that go into changing the inputs for a product or service into an output that is valued by the customer. Companies conduct value-chain analysis by looking at every production step required to create a product and identifying ways to increase the efficiency of the chain.

 

Completing a value chain analysis allows businesses to examine their activities and find competitive opportunities. For example, McDonald's mission is to provide customers with low-priced food items.

 

For companies that produce goods, a value chain comprises the steps that involve bringing a product from conception to distribution, and everything in between—such as procuring raw materials, manufacturing functions, and marketing activities.

 

The benefits of conducting a value chain analysis include identifies the activities and costs in the production process; identifies bottlenecks and opportunities for competitive advantage; provides insight into the cost structures of numerous companies in an industry, as well as related businesses in adjacent industries; breaks down current activities into more manageable segments, so that managers can reduce costs and improve efficiency; and provides clear information about competitor advantages, such as products, manufacturing methods, or distribution networks.

 

The primary activities of Michael Porter's value chain are inbound logistics, operations, outbound logistics, marketing and sales, and service. The goal of the five sets of activities is to create value that exceeds the cost of conducting that activity, therefore generating a higher profit. 

 

In some industries, value chain structures vary significantly from typical methodologies. Wine, for example, is a highly specialized industry that does not follow the typical manufacturing process of most other industries. Currently, wine is produced using several different types of grape growing systems; each system has its own unique characteristics. Tourists to France will buy a wine that combines qualities of two or more grape varietals in one bottle. This makes the wine unique and is how it is classified in the industry (such as Bordeaux and Champagne wines). In order to make these wines into commercially viable products, vintners must adhere to strict U.S.

 

Examples also include companies like Starbucks, wherein Starbucks aims at building customer loyalty through its in-store customer service. Service training is a key component of the value chain that helps to make its offerings unique. A substantial amount of value is created when baristas make drinks for customers.

 

Effective management of this value chain provides opportunities for cost containment and differentiation that create avenues for enhanced customer and brand value. Value chain management is a set of measures used by executives to determine how they can increase the value that their company creates in its supply chain. These measures are designed to maximize the value delivered to the customer and minimize costs.

 

In a recent article, the economist advocated for private-sector action on digital skills, warning that "in an era of automation and digitisation, many market activities have moved beyond being products of human skill." This crisis has received significant attention from many stakeholders in government, academia and civil society who have argued that people are not being prepared for a world where ‘digital technologies can be applied flexibly, creating new possibilities and changing old ways of doing things.

 

It is very important for an African business to ensure that the technical, organisation, and personal value is infused in the business before they go to market, and continuously thereafter. When an organisation is not cognisant with the value chain of marketing, no matter it’s in Africa or elsewhere in the world, they will go through losses later on.

 

Audrey E. Patton, Professor of Digital Disruption and Technology at University of Michigan Business School argues that a central feature of disruptive innovation is "the creation of new markets by disrupting incumbent companies’ business models", and that "technology-enabled disruption always engenders a number of business disruptions." She also considers it a fact that every modern technology historically has disrupted established markets.

 

Sources: UMich

Cabanga Media Group is a media and business services company with interests in Botswana, Nigeria, Kenya, South Africa, Zambia and Zimbabwe.