Value Chain Analysis

Creating Customer Value and Organizational Value

Organizations Opens in new window must continually monitor technological change Opens in new window and global competition Opens in new window, but unless they identify and meet customer preferences, all is for naught.

Creating customer value by fulfilling their desires is critical to the success of businesses. If customers crave pistachio gelato and you only supply vanilla, your sales suffer and someone else steps in to supply pistachio.

Business organizations must continually seek to add value by adapting to changing customer preferences. For example, eBay has created an entire market for auctioning low-cost collectibles.

Throughout this post, we use the terms customer value and organizational value, because understanding these important concepts is the hallmark of understanding value chain analysis, our topic in focus.

Customer value is the benefit received by the customer from a product or service relative to its cost.

The following example illustrates this rather abstract definition.

Suppose you are looking to purchase a particular tablet computer that sells for $129; you really like this particular tablet, and therefore, you would be willing to pay $159.

You buy this model for $129 and get value of $159. So we would say that you, as the customer, have received $30 of value.

Organizational value is the benefits received by various stakeholders from their investment in the organization.

Suppose you start a business by investing $100,000 and borrow another $50,000 from the bank. The total investment is $150,000.

After a couple of years of making profits, you can sell the firm for $200,000 as the buyer realizes that the business has good prospects to continue to make profits.

We would say that you have created $50,000 of organizational value from running the business.

Leveraging on Value Chain and Value Chain Analysis

Value chain analysis, along with quality programs such as TQM Opens in new window and Six Sigma, help a business organization have a customer focus and achieve organizational value.

Value chain analysis is an approach that looks at what the organization does through the eyes of the customer.

Business organizations do many things, but from a customer perspective, only some activities provide value to the customer.

Those activities are called the value chain. A typical value chain might be:

Research and Development     →     Design and Engineering     →     Production Distribution     →     Customer Service

The value chain is the sequence of organizational processes that are critical to satisfy the organization’s customers.

Any activities that are not on the value chain are considered non-value-added activities, which do not provide value for customers.

Examples of non-value-added activities include the moving and storing of products and many administrative tasks.

Elimination of non-value-added activities allows the organization to save resources and sell its products and services at a lower price without reducing the value of customers.

Value chain analysis is associated with other organizational tools, such as CIM Opens in new window, JIT Opens in new window, and TQM Opens in new window. These methods take advantage of technology to allow organizations to compete and meet customer demands.

Competition and globalization Opens in new window require businesses to be efficient producers to survive.

Competition among firms drives prices down and eliminates inefficient firms that are unable to provide goods and services that customers want.