The Business Model (As Is) describes how the company makes money:
✔ Scope of it's products & services
✔ Sources of product & materials
✔ Channels to reach customers
✔ Markets the business is active in
✔ Financial Values & Volume
The Operating Model describes how the activities in the Value Chain are executed:
- Level 0, Level 2, Level 3 & Level 4 Processes
- Who does what
- How is success measured
The Operating Model (OM) describes how people will do their day to day jobs and the content of the OM is used in training and standard operating procedures.
Value Chain Activities
The Value Chain is your Engine
What key elements make up a value chain?
Most companies attempt to builds significant value by combining a blend of raw materials, specialised skills and services to provide something of value to the consumer. The manner in which these activities are executed represents the value chain. Engineering value chains typically include the following:
- Research and Development: This involves development of new technologies and processes. A well-financed R&D department can have a significant return on investment.
- Service & Engineering: This activity turns the results of the R&D activities into a repeatable service and product.
- Supply Management: All required materials needed for manufacture will need to be sourced in such a way that ensures non stop production.
- Production Testing and Quality Control:Completed parts need to be tested and inspected to ensure that they meet the advertised material and quality specifications.
- Distribution / Route to Market: The products need to be made available to the customers, and so shipping and inventory management systems are implemented at this stage in the process.
- After Sales Service:Product support is required to ensure that customers remain happy with their purchase, which ultimately results in customer loyalty.
- Waste Disposal and Recycling:The end of product lifecycle needs to be considered and managed at this stage.
How can you carry out a Value Chain Analysis?
When performing a value chain analysis, you need to determine what type of competitive advantage you want your company to pursue. This can either be a cost advantage approach, or a differentiation advantage approach.
A cost advantage approach is used if you want to be competitive on your pricing, and a differentiation advantage approach is best suited to a company that wants to provide better quality parts to their clients.
This approach requires you to work through the following 5 steps:
- Identify primary and support activities– As previously listed, these are all the activities that need to be performed to deliver a product to your customer.
- Establish the relative importance of each activity with respect to the cost of the product–This is done so that all major cost heavy activities are handled first during the optimisation process, as they will have the biggest effect on you margin.
- Identify cost drivers of each activity– You will need to analyse each of the activities and determine what the specific drivers are for the costs of that activity. This is needed so that you can focus on improving those activities.
- Identify links between activities– The way in which activities affect each other needs to be fully understood. An optimisation on one activity can result in a knock-on effect that might reduce or even increase the costs of another activity.
- Identify opportunities for reducing costs– After all the analyses have been performed, an action plan needs to be established to address the inefficiencies in the system.
This approach requires 3 general steps:
- Identify value creating activities for customers– The previously listed value chain activities need to be analysed and all the activities that contribute the most to increasing customer value needs to be listed. These can be marketing, manufacturing, etc.
- Evaluate differentiation strategies for improving customer value– Some viable strategies include adding more features or improving customer service and interaction.
- Identify optimal sustainable differentiation– The interconnectivity of all the value chain activities and their effect on superior differentiation needs to be fully understood so that a strategy can be developed.
Whether you choose to follow a cost based, or quality-based differentiation model, improvements in each of these areas will help your business increase its overall efficiency, and as a result, the profitability. A well-oiled value chain can dramatically improve the way in which your business functions.