04.07.06 The 2nd Key for Adding Value to Your Business
2. Understand the Value Chain of your Product
A value chain refers to a sequence of steps, activities and processes where value is added at each stage thereby leading to a finished product, service or outcome.
The success of our cosmetics business stemmed from the fact that I knew the value chain like the back of my hand. From identifying suitable suppliers in the UK, items would be ordered and the consignment transported by airfreight to Entebbe Airport in Uganda; followed by clearing the cargo through customs; transporting the cosmetics to our outlet in Kampala; receiving and recording the inventory and storage. Thereafter, prices were set by adding the various costs and gross margin to the buying price of each item to get the selling price. Next was price tagging, followed by displaying the products on our shelves and alerting our retailers about the new stock. Thereafter, the items would be sold to buyers.
The production of Tyrian Purple had a distinct value chain which was responsible for the steep price tag that was associated with that product; although historians lament that most intricacies of that chain were kept secret and never recorded in any ancient writings. What we know is that apparently, the value chain started with the harvesting of sea snails. Then their glands would be removed, salted and left to ferment for three days. Next, the secretion would be heated for ten days to make the dye, which was checked by dipping cotton wool or fabric until the required colour or stain was obtained. In other words, there was some ‘value’ added at each step, in order to create the final value of the finished product.
A value-adding businesswoman must understand and map the value chains of the products and services delivered by her enterprise. This could be an engaging exercise but it will help you to plan and harness your business better. See what Proverbs 21:5 says (NLT): 5Good planning and hard work lead to prosperity, but hasty shortcuts lead to poverty.
Technically speaking, a conventional value chain includes primary and secondary activities. While primary activities create and sell your product, secondary activities support the primary activities to ensure that they (primary activities) are more efficient and effective so as to create a competitive advantage.
Primary activities include inbound logistics for getting inputs, raw materials or stock from suppliers and storing them; operations activities for converting inputs into a product or service; and outbound logistics which include activities, processes and systems for storage, collection and delivery or distribution of the finished product to customers. Marketing and sales encompass activities for promoting and building the brand of your product or service as well as distribution. Service covers the activities and processes that you will use to build long-term relationships with customers.
Secondary activities comprise procurement of inputs, materials and equipment; technological development; human resource management and company infrastructure for accounting, finance, legal, general public relations management, administration, and quality assurance.
Value chains are supported by supply chains which refer to the process of supplying the finished product to the targetted buyer so as to meet his or her need and ultimately, leading to customer satisfaction.
Therefore, analysing a value chain is very important for business success. To do so, begin by identifying all the primary and secondary activities involved in creating each of your product or service. Break them into sub-activities. Next, assess the value that each activity adds to the process, as well as the costs involved for each. How does the activity contribute to the satisfaction or enjoyment of the end user? How does it benefit or create value for you or your business? Will that attract more buyers hence enhancing your revenue or profits? What costs are involved at each step? How can you lower the costs yet improve the value of the finished product? Lastly, identify the opportunities for creating a competitive advantage in your product. Is there a window for dropping the costs incurred at any step in the primary activities so that you position a competitively lower yet profitable price in the market? Which steps are wasteful and can therefore be eliminated without compromising the quality of your finished product or service? Are there any activities that could be outsourced so that you ultimately cut back on your costs? All in all, identify those steps, activities or processes that require the least cost, effort and time while yielding the greatest return on investment. Well-managed activities can drop the cost of production thereby enabling you to engage the competition by positioning a cheaper product in the market and attracting more buyers.