The Value Chain, Strategic Performance & Profits

Michael Porter’s Value Chain

Aligning all of the elements of your value chain with your business strategy heightens profitability and strategic performance.  This, the 3rd article in our 5-part series — The 5 Keys to Strategy Execution – is the focus of this article.

Most of us are familiar with the Lean term, Value Stream. Per Wikipedia, “Value stream mapping is a lean manufacturing technique used to analyze and design the flow of materials and information required to bring a product or service to a consumer. At Toyota, where the technique originated, it is known as ‘material and information flow mapping’. It can be applied to nearly any value chain.”

While many companies have mapped their value streams to improve efficiency and cost, not as many have modeled their Value Chain and used it as the powerful tool it can be in strategy execution.

Diagramming your business as a flow of value-adding activities is a powerful step toward building competitive advantage.The resulting diagram is your value chain, your customized model of activities that deliver your valuable product or service for the market. This concept was first developed and introduced as a standard business management tool by Michael Porter in his 1985 best-seller, ‘Competitive Advantage: Creating and Sustaining Superior Performance’.

How can leaders leverage the Value Chain for business strategy execution? When the Value Chain is well aligned with the strategy, or simply with the company’s Value Proposition for the customer, the Value Chain helps maximize strategic performance.

In many of today’s organizations, however, the Value Chain is not well aligned with the business strategy. This is a common, yet insidious problem. It can happen, for example, as companies implement various initiatives at different times, to increase efficiency and reduce cost. Often-times, the changes and investments made in such initiatives support objectives that differ from the strategy and even impede people in delivering the company’s unique difference to the customer, the reason your customers buy from you. How can this happen? Let’s look at a typical example:

Let’s say that your company’s Value Proposition (competitive differentiation) is rooted in ‘customer intimacy’, a high service level strategy that provides customers with individually tailored products and services. This Value Proposition is most effectively delivered when the Value Chain is designed to enable employees across the company to make good, timely decisions, supported by equipment, procedures and processes that are optimized for flexibility in meeting customers’ specific needs.your business has also introduced new cost-containment goals and has improved efficiency; Purchasing has made decisions on purchases based on efficiency and cost, typical criteria used in today’s companies. Therefore, your capital equipment is being purchased based on its capacity to make high volume parts at low cost. Managers are planning changes in Operations to maximize efficiency, including standardizing work procedures, requiring approvals for exceptions.

How can your costs be increased when your people take actions to deliver the customization that is part of your company’s value proposition. How might Sales people and customers be impacted?  What might be some unplanned consequences of  strategic misalignments such as these in an organization?

Our next article will focus on Key # 4, Balanced Metrics

1. Strategic Understanding
2. Leadership
3. Activities and Structure
4. Balanced Scorecard / Metrics
5. Human Capital

Together with Market Discipline, the 5 keys comprise the recipe for successful strategic performance.

 

 

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