Value chain analysis methods are processes where a firm identifies its primary and support activities that add value to its final product and then analyzes these activities to reduce costs or increase differentiation. Firms are using value chain analysis methods as strategy tools to improve their organizational capabilities by recognizing the most valuable capabilities and capabilities that need improvement for the firm to have a competitive advantage in their industry. Industry professionals argue that a value chain analysis method identifies a sequential chain of the main activities that the firm undertakes and distinguishes between primary activities (those involved in the transformation of inputs and interface with the customer) and support activities. In a healthcare case study, the value chain analysis called for any processes that can deliver the attributes to create customer satisfaction and produce a firm-customer relationship that develops into long-term customer loyalty towards the firm. Overall, a value chain analysis can help encourage both intra- and inter-organizational resources that recognize the necessary methods for a firm to achieve its goals and objectives. Michael Porter introduced the concept of a generic value chain model in 1985 that displayed all a firm’s internal activities that add direct value to the firm’s final product and the support activities that indirectly add value. Porter describes the support activities in the value chain analysis model as the firm’s infrastructure, human resource management, procurement, and technology. The primary operations of the value chain model involve inbound logistics, operations, outbound logistics, marketing and sales, and service. Porter’s value chain model of primary and support activities equals a profit for the firm. Porter’s principal activities in his design add direct value to the production process but remain on the same level as the support activities. Porter's value chain model discovers the similarities that create opportunities for differentiation and reduction. Other value chain analysis models disaggregate a firm’s relevant activities strategically to identify the competitive advantage’s source of events. These events could cost a firm less or more to enact than market competitors. They can also instruct the firm’s strategy to move overall value creation for the firm. In a value chain analysis model, a firm’s strategies are essential resources to its value creation. The strategies themselves create the value that defines the resource requirements in developing all the necessary successful competencies. A firm’s management and organizational design are also essential in developing strategies. The one variable a firm must consider is the ability to enhance the value created within the model by developing business and customer relationships. The value generated by a firm equates directly to its profit margin, so the successful formula is the value creation minus the value creation’s cost to equal the firm’s profit margin. The more value a firm creates, the more profits it will gain and can report to its investors. Not only does the value generate more profits, but the firm also gains the competitive advantage it is searching for in its industry.
Differentiation Advantage Strategy
Firms using a differentiation advantage strategy compete within their industry rather than the incurred costs. Firms using this approach can gain industry market share by developing better products than their competitors. Creating better products for a firm might result in a higher cost structure for the organization. The differentiation advantage strategy shows a firm’s management how to identify their customers’ value-creating activities by having their management focus on the contributory activities that create the most value for the client. The first step is for the firm’s management to identify the necessary activities, but the next step is to evaluate the internal strategies. A firm’s management should have a tremendous focus on the value activities that create the value the firm needs to have more customer value. In the evaluation stage, a firm’s management can add more product features, improve customer service and responsiveness, customize to the customers, and add complementary products to the primary commodities. These management actions can increase customer value by developing product differentiation. After identification and evaluation, a firm’s management should seek to identify the best sustainable differentiation. Competitive advantage is possible with greater differentiation and customer value when a firm’s management can have the activities and strategies work interchangeably. When a firm’s management has activities and plans working interchangeably, the efforts should show the firm a sustainable differentiation advantage.
Cost Advantage Strategy
A firm using a cost advantage strategy positions itself to gain a competitive advantage based on costs and what produces them. The cost advantage strategy identifies a firm’s primary and support activities by requiring proper knowledge of the firm’s operations. A firm’s management must know how to operate the firm’s processes to distribute the value a firm is working to create. Once a firm’s management masters the operation of the processes, the firm must establish relative importance with the activity cost of each process and understand if the process is deficient. Understanding the deficient factors can assist a firm’s management focus on removing the weaknesses. The firm’s management will view specific processes, such as labor-intensive, to improve or remove them. Management’s actions help a firm identify the links between the activities that can assist with improvement. Determining the connection between the activities can help management understand cost improvements that can subsequently positively affect the entire value chain analysis. Acknowledging the event links management's support with recognizing the opportunities for reducing inefficient activities and implementing a strategic plan to improve the activities. The cost advantage strategy is a good strategy if the firm can support the analysis framework designed within the strategy.
Viable Stakeholder Value Target Strategy
Establishing a viable stakeholder value target is another strategy a firm can use to gain a competitive advantage. The success of the stakeholder value target depends on the firm’s individual stakeholder’s goals and perceptions. A good stakeholder value target strategy develops a generic framework for the entire firm to achieve success instead of the single stakeholder. The firm should align its internal strategies, including its overall business, financials, technology, and marketing. This strategy creates value from within the firm’s organizational resources, and those processes have been funded by operations management, customer relationship management, innovation, and regulatory sources. The firm’s management should monitor and strategize the value creation at the mid-level. Mid-level management can work to improve the firm’s utilization of assets and cost structure by focusing on productivity. Now the senior management focus differs from the mid-level management center, which should be the case with a strong organizational structure and design. If a firm’s senior management is working on the same strategies as mid-level management, then the firm does not have competent mid-level management, which leaves the senior-level management responsibilities in disarray, which damages the firm’s overall strategies. Most firms’ senior management is responsible for working the firm into new markets, product and market growth, and possible business diversification. In this strategy, a firm’s management roles are pivotal to the entire success of the firm and the strategy. Value creation is an important focus for a firm’s management in this strategy, so management should concentrate on improving the assigned responsibilities from the organizational structure of the firm.
Developing the right strategies for value creation is crucial to a firm gaining a competitive advantage. This competitive edge helps a firm gain real business challenges that improve the necessary processes for improvement in their perspective industry. Value creation is primary for a firm to help move more of its products and services to their target markets. When a firm focuses on value creation, they cause improvements in their organizational processes as well as improve their management personnel. Implementing the correct strategies to improve competitive advantage through value creation is imperative to achieving profitable and long-lasting growth.