In value chain analysis, value is primarily measured by assessing the cost incurred and the value generated by each individual activity within the organization's value chain. This assessment is then compared against industry benchmarks and best practices to understand performance.
The process of measuring value begins by systematically identifying all the primary and support activities that constitute the value chain.
The Measurement Process
According to analysis of value chain principles:
Measuring and enhancing the performance of value chain activities begins by identifying primary and support activities within the organization's value chain. Assess the cost and value generated by each activity, comparing performance to industry benchmarks and best practices.
This highlights the core components of value measurement:
- Identification of Activities: Breaking down the business into its fundamental activities, categorized as primary (e.g., inbound logistics, operations, marketing) and support (e.g., procurement, technology development, human resources).
- Cost Assessment: Determining the costs associated with performing each specific activity. This includes direct costs (like labor, materials) and indirect costs allocated to the activity.
- Value Generated Assessment: Evaluating the contribution of each activity to the overall perceived value of the product or service for the customer, or its contribution to the firm's profit margin. This is often related to the customer's willingness to pay that is attributable to that specific activity.
- Performance Comparison: Comparing the measured cost and value generated for each activity against:
- Historical performance within the company.
- Competitors' performance (where data is available).
- Industry benchmarks and best practices.
Understanding "Value Generated"
"Value generated" in this context isn't just revenue. It's about how an activity contributes to creating a competitive advantage, which can manifest as:
- Increased Customer Willingness to Pay: Activities that enhance features, quality, brand perception, or customer service directly increase what customers are willing to pay.
- Improved Efficiency Leading to Lower Costs: While a cost measure, efficiency directly impacts the firm's profit margin for a given level of value delivered, effectively increasing the 'value' retained by the firm.
- Differentiation: Activities that make a product or service unique and appealing to a specific customer segment.
- Speed and Responsiveness: Logistics or operations activities that enable faster delivery or better service.
Measuring this can involve:
- Market research on customer preferences and price sensitivity.
- Analyzing how specific features or service levels correlate with sales or pricing power.
- Tracking customer satisfaction metrics linked to specific activities.
- Evaluating the impact of process improvements on quality and defects.
The Role of Cost Assessment
Understanding the cost structure of each activity is crucial because the goal of value chain analysis is to maximize the difference between the total value generated (what buyers are willing to pay) and the total cost of all activities. This difference represents the profit margin.
By assessing costs activity by activity, companies can identify:
- Areas of high cost relative to the value added.
- Opportunities for cost reduction without sacrificing value.
- Cost drivers – the factors that cause costs to vary for an activity.
Utilizing Benchmarks and Best Practices
Comparing the cost and value performance of activities to industry benchmarks and best practices provides external perspective. This helps identify:
- Activities where the company is performing inefficiently (high cost, low value contribution) compared to peers.
- Activities where the company has a competitive advantage (low cost, high value contribution).
- Opportunities to adopt superior methods or technologies used by industry leaders.
For example, if a company's inbound logistics costs are significantly higher than the industry average without a corresponding increase in value (e.g., higher quality inputs), it signals a potential area for improvement.
Example: Measuring Value in Manufacturing
Consider a manufacturing company.
| Value Chain Activity | Measurement Focus | How Value/Cost is Assessed | Comparison |
|---|---|---|---|
| Operations | Efficiency, Quality, Output Rate | Cost per unit produced, defect rate, production volume | Industry standard cost/unit, defect rates |
| Marketing & Sales | Customer Acquisition, Brand Building | Cost per lead, conversion rate, brand perception scores | Competitor marketing spend/results, industry conversion benchmarks |
| Service | Customer Satisfaction, Issue Resolution | Cost per service call, resolution time, customer satisfaction scores | Industry average service costs, CSAT scores |
By measuring these aspects activity by activity and comparing them externally, the company can pinpoint where it creates value effectively and where it needs to improve.
In summary, value in value chain analysis is measured through a detailed assessment of the costs incurred and the value contributed by each primary and support activity, critically evaluated against industry standards and best practices.
