Keeping your small business strong and profitable means you need to have a competitive advantage. Various strategies for analyzing competition can help you outpace them. One way to do this is with value-chain analysis. Value-chain analysis assesses your internal processes to give you an idea of what you’re getting for your money. A value chain includes all activities from start to finish that takes your product from concept to delivery.
If you’re making your own products, you probably know your manufacturing process start to finish. For example, if you make your own soap. You start with raw ingredients including essential oils, beeswax and other materials. Processing includes cooking and cutting the soap, followed by packaging, inventory, and marketing through your online store. Service industries can apply the same concept. In this case, inputs include skills, knowledge, equipment, and the systems you use to provide the service.
Analyzing that process from start to finish helps you figure out areas of improvement. This type of analysis focuses on cost and differentiation advantages to keep your company competitive.
- Cost advantage – finding ways to reduce the cost in the value chain. Cost drivers include anything that affects the costs like raw materials, speed, work hours, and wages. Finding ways to reduce those costs improves your profits. You might simplify the design to cut down on materials and speed up work rate. Changing one cost driver often reduce others, too.
- Differentiation advantage – finding ways to provide the greatest value to customers. You’re trying to make a superior product or give the product extra features. In the service industry, you’re trying to improve the value of the service through extra options or more detailed service. The goal is to differentiate yourself from the competition with greater value. Improving the value means you can increase your pricing for greater profits.
When you understand your value chain, you save money. You also can find ways to determine any areas of weakness in your manufacturing and marketing processes, assess risks in every step, and use your value-chain analysis to forecast solutions.